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                  In The United States Bankruptcy Court
                   For the Western District of Missouri


                                                  )
In re                                             )          Chapter 11
                                                  )
PAYLESS CASHWAYS, INC.,                           )          Case No.  97-50543
                                                  )
                                    Debtor.       )

                    FIRST AMENDED PLAN OF REORGANIZATION

         The Debtor (as hereafter  defined) proposes the following first amended
plan of reorganization  pursuant to the provisions of 11 U.S.C.  ss.ss. 1101, et
seq.
                                   ARTICLE I.
                                  DEFINITIONS

         The  terms  set  forth in this  Article  I shall  have  the  respective
meanings  hereinafter  set forth.  Any  capitalized  term used but not otherwise
defined  herein  shall  have  the  meaning  given  to that  term in the Code (as
hereinafter defined).

         1.1. "Administrative  Expenses" shall mean, collectively,  (a) any cost
or expense of  administration of the Chapter 11 Case allowed under ss. 503(b) or
507(a)(1)  of the Code  including,  without  limitation,  any such  allowed item
constituting (i) an actual and necessary  post-Filing Date expense of preserving
the Debtor's  estate,  (ii) an actual and necessary  post-Filing Date expense of
operating  the  businesses  of  the  Debtor   including,   without   limitation,
post-Filing  Date loans or other advances or extensions of credit to the Debtor,
including  amounts  advanced  to, or credited  to the account of the Debtor,  or
(iii) the amount of any Allowed Claims for reclamation pursuant to ss. 546(c) of
the Code, and (b) and fees or charges assessed against the Debtor's estate under
title 28, United States Code, section 1930.

         1.2.  "Adverse  Determination"  shall  mean a ruling by the  Bankruptcy
Court that  including,  in the  distribution  under the Plan to Allowed Class 2A
Claims,  all or a specified  portion of the shares of New Payless  Common  Stock
otherwise  distributable to Allowed Class 4A Interests and/or Class 5A Interests
to the extent provided in Sections 3.4(a), 3.6 and 3.7 of the Plan would violate
applicable  provisions  of the Code and  thereby  render the Plan not capable of
being confirmed under ss. 1129 of the Code.

          1.3.  "Agent" shall mean CIBC as coordinating and collateral agent for
the DIP Facility.

         1.4.  "Allowed Amount" shall mean, with respect to a particular  Claim,
(a) the amount of a Claim that is listed in the Debtor's Schedules,  as they may
from time to time be  amended  in  accordance  with Rule 1009 of the  Bankruptcy
Rules, as not disputed,  contingent or unliquidated,


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if the holder of such  Claim has not filed a proof of claim with the  Bankruptcy
Court within the applicable  period of limitation  fixed by the Bankruptcy Court
pursuant to Rule  3003(c)(3) of the  Bankruptcy  Rules,  or (b) if a holder of a
Claim has filed a proof of claim with the Bankruptcy Court within the applicable
period of limitation  fixed by the Bankruptcy  Court pursuant to Rule 3003(c)(3)
of the  Bankruptcy  Rules:  (i) the  amount  stated in such proof of claim if no
objection  to such  proof of claim has been  interposed  within  the  applicable
period of  limitations  fixed by the Code or applicable  Bankruptcy  Rules or as
otherwise  fixed by the Bankruptcy  Court, or (ii) such amount as shall be fixed
by an  order of the  Bankruptcy  Court  which  has  become  a Final  Order if an
objection has been interposed  within the applicable period of limitations fixed
by the Code,  applicable  Bankruptcy  Rules, or the Bankruptcy  Court.  "Allowed
Amount"  shall not include any interest on or fees with respect to a Claim which
have accrued  after the Filing Date except with respect to Class 2 Claims to the
extent  (i)  permitted  by ss.  506(b)  of the  Code  or (ii)  made as  adequate
protection  payments under ss. 363(e) of the Code.  "Allowed Amount" shall mean,
with respect to a particular Interest,  (a) that number of shares represented by
such Interest as set forth in the Debtor's stock transfer  agent's  records,  as
they may be amended  and  updated  from time to time,  if no  objection  to such
Interest has been interposed  within the applicable  period of limitations fixed
by the  Bankruptcy  Court,  or (b) that  number  of shares  represented  by such
Interest as shall be fixed by an order of the Bankruptcy  Court which has become
a Final Order, if an objection to such Interest has been  interposed  within the
applicable period of limitations fixed by the Bankruptcy Court.

         1.5.  "Allowed Claim" or "Allowed Class  ___________  Claim" shall mean
any such Claim for which an Allowed Amount has been determined.

         1.6.  "Allowed  Interest" or "Allowed Class  _________  Interest" shall
mean any such Interest for which an allowed Amount has been determined.

         1.7. "Bank Parties" shall have the meaning set forth in Section 11.7 of
the Plan.

         1.8.  "Bankruptcy  Court"  shall  mean that unit of the  United  States
District  Court  for the  Western  District  of  Missouri  consisting  of  those
bankruptcy  judges in  regular  active  service  in such  district  to whom such
District  Court has referred  bankruptcy  cases and  proceedings  pursuant to 28
U.S.C. ss. 157(a).

         1.9.  "Bankruptcy  Rules"  shall mean the Federal  Rules of  Bankruptcy
Procedure,  as amended from time to time, as the same shall be applicable to the
Chapter 11 Case.

         1.10. "Business Day" shall mean any day except Saturday, Sunday and any
other day on which commercial banks in New York City are authorized to close.

         1.11.  "Cash"  shall  mean cash,  cash  equivalents  and other  readily
marketable  direct  obligations of the United States of America and certificates
of deposit issued by banks.

         1.12.  "Chapter  11 Case"  shall mean the case under  chapter 11 of the
Code commenced by the Debtor on the Filing Date.


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         1.13.  "CIBC" shall mean Canadian Imperial Bank of Commerce.

         1.14. "Class" shall mean a group of Claims or Interests,  consisting of
Claims or Interests which are substantially similar to each other, as classified
pursuant to the Plan.

         1.15.  "Class 2A Effective Date Payments" shall mean the payments to be
distributed  to the holders of Allowed Class 2A Claims on the Effective  Date in
accordance with the provisions of Sections 3.4(a)(i) and 3.4(a)(ii) of the Plan.

         1.16.  "Class  3A  Entitlement"  shall  mean a number  of shares of New
Payless Common Stock equal to (a) 19,000,000,  minus (b) the number of shares of
New Payless  Common Stock to be  distributed to the holders of the Allowed Class
2A Claims  pursuant  to Section  3.4(a) of the Plan  (i.e.,  10,800,000  shares,
subject to  adjustment as provided in clauses (1), (2) and (4) of the proviso to
Section 3.4(a)(iv)), plus (c) the number of any additional shares of New Payless
Common  Stock to be  distributed  to the holders of Class 3A Claims  pursuant to
Sections 3.4(a), 3.6 and 3.7 of the Plan.

         1.17. "Closed Store Value" shall mean the value of the Closed Synthetic
Lease Stores, as determined pursuant to Section 3.4(c).

         1.18.  "Closed  Synthetic  Lease Stores" shall mean the Debtor's  Store
Nos. 249 (Lake Jackson, TX) and 257 (St. Cloud, MN); provided,  however, that if
either or both of these stores have been sold prior to the Effective  Date,  and
the net  cash  proceeds  thereof  put  into  the  Synthetic  Lease  Escrow,  all
references  in the Plan to such closed  store or stores  shall be deemed to be a
reference to the proceeds contained in the Synthetic Lease Escrow.

         1.19.  "Code" shall mean the Bankruptcy  Reform Act of 1978 as amended,
11 U.S.C.  ss.ss. 101 et seq., as the same shall be applicable to the Chapter 11
Case.

         1.20.  "Collateral"  shall have the meaning set forth in the definition
of "New Term Notes."

         1.21.   "Company"  shall  mean  Payless  Cashways,   Inc.,  a  Delaware
corporation, as reorganized pursuant to the Plan.

         1.22. "Confirmation Date" shall mean the date the Confirmation Order is
entered.

         1.23.   "Confirmation  Order"  shall  mean  an  order  entered  by  the
Bankruptcy Court confirming the Plan under ss. 1129 of the Code.

         1.24.  "Corporate  Reorganization"  shall mean the merger of the Debtor
with and into the Company, as described in Section 6.1.

         1.25.  "Debtor" shall mean Payless, as debtor and debtor-in-possession.


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         1.26. "Designated Collateral" shall mean (i) inventory at the 29 stores
to be closed pursuant to the Debtor's June 27, 1997  Restructuring  Presentation
(the "Business Plan"),  (ii) the real estate interests in 9 of such stores to be
closed (and the 7 properties  currently held for sale) and any related  fixtures
and equipment which presently  secure the Existing Credit Facility (iii) the tax
refund resulting from the Small Business Job Retention Act of 1996 and filed for
by the Debtor on October 9, 1996 and (iv) the proceeds of the  promissory  notes
(in the  aggregate  principal  amount  of  approximately  $1,050,000)  presently
pledged to the Existing Lenders in connection with prior store  dispositions and
which mature on December 1, 1997.

         1.27. "Designated  Consummation Date" shall mean a particular day to be
designated on or before the tenth (10th) day following the Confirmation  Date by
the Debtor,  in its judgment  reasonably  exercised after  consultation with the
Pre-petition Agent, the Agent, and the Underwriters,  which is at least ten (10)
but not more than thirty (30) days after the Confirmation Date.

         1.28.  "DIP  Facility"  shall  mean that  certain  debtor-in-possession
financing   agreement   and   documents   related   thereto  (each  as  amended,
supplemented,  or modified  from time to time),  entered into among the Company,
CIBC, as Agent, and certain other financial institutions, authorized pursuant to
the  Interim  and  Final  Orders  Authorizing  Debtor  to  Obtain  Post-Petition
Financing Pursuant to 11 U.S.C. ss.ss. 105, 361, 362, 364(c)(1),  364(c)(2), 364
(c)(3) and 364(d)(1) and to Utilize Cash  Collateral  Pursuant to 11 U.S.C.  ss.
363 and Granting Adequate Protection to Pre-Petition Secured Parties, entered by
the Bankruptcy Court on July 21, 1997 and August 20, 1997, respectively.

         1.29. "DIP Lenders" shall mean those financial institutions  referenced
in the definition of DIP Facility.

         1.30.  "Disallowed  Amount"  shall mean,  with  respect to a particular
Disputed Claim,  that amount which is equal to the difference,  if any,  between
the  Face  Amount  of  such  Disputed  Claim  and  the  Allowed  Amount  of  the
Subsequently Allowed Claim related thereto.

         1.31.  "Disallowed  Interest"  shall mean, with respect to a particular
Disputed  Interest,  that  number of  shares  equal to the  difference,  if any,
between the Face Amount of the Disputed  Interest and the Allowed  Amount of the
Subsequently Allowed Interest related thereto.

         1.32.   "Disclosure  Statement"  shall  mean  that  certain  disclosure
statement for the Debtor filed with the Bankruptcy  Court on the Filing Date, as
the same may be amended from time to time.

         1.33.  "Disputed  Claim" or "Disputed  Class ________ Claim" shall mean
any Claim for which an  Allowed  Amount  has not yet been  determined,  and with
respect  to  which  an  objection  has  been  interposed  on  or  prior  to  the
Confirmation Date or such other date as may be fixed by the Bankruptcy Court and
not  subsequently  withdrawn  or  finally  resolved.  An  application,   motion,
complaint or any other legal pleading to subordinate or dismiss a Claim shall be
deemed an objection thereto.


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         1.34.  "Disputed Interest" or "Disputed Class _________ Interest" shall
mean any Interest for which an Allowed Amount has not yet been  determined,  and
with  respect  to which an  objection  has  been  interposed  on or prior to the
Confirmation Date or such other date as may be fixed by the Bankruptcy Court and
not  subsequently  withdrawn  or  finally  resolved.  An  application,   motion,
complaint or any other legal  pleading  seeking to subordinate an Interest shall
be deemed an objection thereto.

         1.35.  "Distribution  Date"  shall  mean  the  Effective  Date and each
subsequent date as may be chosen by the Debtor (but,  subject to Section 5.14 of
the Plan,  not more than six calendar  months after the  preceding  Distribution
Date) for the making of distributions under the Plan.

         1.36.  "Effective Date" shall mean the first Business Day:

         (a)    after the Designated Consummation Date;

         (b)    on which no stay of the Confirmation Order is in effect; and

         (c)    on  which all conditions  set forth  in Section 7.1 of  the Plan
                have occurred or been waived as provided in the Plan.

         1.37. "Equity Committee" shall mean the Equity  Shareholders  Committee
appointed  in the Chapter 11 Case by the United  States  Trustee For The Western
District of Missouri,  as the  membership of such Committee is from time to time
constituted and reconstituted.

         1.38.  "Existing  Credit  Facility"  shall  mean  (i) the  Amended  and
Restated Credit Agreement, dated as of October 3, 1996 among the Debtor, certain
banks and financial  institutions party thereto,  CIBC, as administrative  agent
and collateral  agent, and The Bank of Nova Scotia,  NationsBank of Texas,  N.A.
and Bank of America  National  Trust and Savings  Association,  as co-agents and
(ii)  documentation with respect to cash management  obligations,  interest rate
swap obligations and foreign exchange  obligations owing to Existing Lenders, as
each of the same may have been subsequently amended, modified or supplemented.

         1.39.   "Existing   Lenders"   shall  mean  those   certain   financial
institutions party to the Existing Credit Facility.

         1.40.  "Existing  Prudential  Facility"  shall mean the Loan  Agreement
dated June 20, 1989 among the Debtor, Knox Home Centers, Inc., Somerville Lumber
and Supply Co.,  Inc.  and The  Prudential  Insurance  Company of America or its
successor in interest, as the same may have been subsequently amended,  modified
or supplemented.

         1.41.  "Existing Synthetic Lease Facility" shall mean the Participation
Agreement  dated as of  February  23,  1995 among the  Debtor,  as Lessee and as
Construction  Agent,  Wilmington  Trust  Company,  as Certificate  Trustee,  the
persons  described  therein,  as  Certificate  Purchasers,  the  persons  listed
therein,  as  Lenders,  and BA Leasing & Capital  Corporation,  as Agent for the
Lenders and Certificate  Purchasers,  together with certain  agreements  entered
into  in  connection  therewith,  all as may  have  been  subsequently  amended,
modified or supplemented.


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         1.42. "Exit Facility" shall mean a revolving credit facility  evidenced
by the  applicable  portion of the New Credit  Agreement,  pursuant to which the
Exit Notes are to be issued, having substantially the terms described in Section
XIV of the Term Sheet attached hereto as Exhibit A.

         1.43.  "Exit Lenders" shall mean those certain  financial  institutions
party to the Exit Facility.

         1.44.  "Exit Notes" shall mean the notes issued by the Company pursuant
to the Exit  Facility,  bearing  interest at a rate per annum equal to LIBOR (as
defined in the New Credit Agreement) plus 2.5% and maturing on May 31, 2002.

         1.45. "Face Amount" shall mean, with respect to a particular Claim, (a)
if the holder of such  Claim has not filed a proof of claim with the  Bankruptcy
Court within the applicable  period of limitation  fixed by the Bankruptcy Court
pursuant to Rule  3003(c)(3) of the Bankruptcy  Rules,  the amount of such Claim
that  is  listed  in the  Debtor's  Schedules,  as not  disputed,  continent  or
unliquidated; or (b) if the holder of such Claim has filed a proof of claim with
the  Bankruptcy  Court within the applicable  period of limitation  fixed by the
Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules, either (i)
the liquidated  amount,  if any,  stated in such proof of claim if the amount of
such Claim has not been  estimated by the  Bankruptcy  Court pursuant to a Final
Order, or (ii) the estimated amount thereof if the amount of such Claim has been
estimated by the Bankruptcy Court pursuant to a Final Order. "Face Amount" shall
mean, with respect to a particular Interest, the number of shares represented by
such Interest if such Interest were not disputed.

         1.46.  "Filing Date" shall mean July 21, 1997.

         1.47.  "Final Order" shall mean an order or judgment of the  Bankruptcy
Court (a) which is not the subject of a pending appeal, petition for certiorari,
or other  proceedings for review,  rehearing,  or reargument,  (b) which has not
been reversed, stayed, modified or amended, and (c) respecting which the time to
appeal from or to petition  for  certiorari  or to seek  review,  rehearing,  or
reargument  of such order  shall have  expired,  as a result of which such order
shall have become final in accordance with Rule 8002 of the Bankruptcy Rules and
other applicable law.

         1.48.  "Interests"  shall mean the rights of the  holders of the issued
and  outstanding  shares of Old Payless  Preferred  Stock or Old Payless  Common
Stock determined as of the Effective Date.

         1.49.  "Market  Rate"  shall  mean  such rate of  interest  as shall be
determined by the Bankruptcy Court to result in a value for the distributions to
be made  pursuant to  paragraph  3.2 of the Plan equal to the minimum  value set
forth in ss. 1129(a)(9)(C) of the Code.

         1.50.  "Net Cash  Proceeds"  shall mean (a) cash  proceeds  (including,
without  limitation,  all  cash  proceeds  by  way of (i)  deferred  payment  of
principal pursuant to a note or installment receivable or otherwise, but only as
and  when  received  and  (ii)   receivables   and  other  assets   retained  as
consideration),  minus (b) reasonable and customary  brokerage  commissions  and
other 


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reasonable and customary fees and expenses  (including  reasonable and customary
fees and expenses of counsel and investment bankers and reasonable and customary
inventory  liquidation  costs) related to the realization of such cash proceeds,
minus  (c)  payments  made  to  retire  indebtedness  (other  than  indebtedness
outstanding  under the Existing  Credit  Facility)  secured by such assets being
sold or otherwise  disposed of where payment of such indebtedness is required in
connection with such sale or disposition.

         1.51. "New Credit  Agreement" shall mean the credit agreement among the
Company,  CIBC, as coordinating and collateral agent, the Existing Lenders,  the
Exit Lenders and certain other financial  institutions party thereto, which will
be dated the  Effective  Date and which will  evidence the Exit Facility and the
Post-Consummation Facility and pursuant to which the Exit Notes and the New Term
Notes will be issued.  The term "New Credit Agreement" also includes all related
documents executed in connection therewith.

         1.52. "New Payless Common Stock" shall mean the shares of common stock,
par value $0.01 per Share, authorized by the certificate of incorporation of the
Company,  a copy of which is  annexed  hereto  as  Exhibit  B,  which  are to be
distributed  by the Company on or after the Effective Date to holders of Allowed
Class 2A Claims,  Class 3A Claims,  Class 4A Interests and Class 5A Interests as
set  forth in the  Plan.  As of the  Effective  Date,  20,000,000  shares of New
Payless Common Stock will be available for distribution under the Plan.

         1.53.  "New  Prudential  Facility"  shall mean that certain Amended and
Restated Loan  Agreement to be executed and delivered by the Company in favor of
The  Prudential  Insurance  Company of America or its successor in interest,  in
form and substance satisfactory to the Debtor, the Required Existing Lenders and
the Required Exit Lenders,  to be entered into as of the Effective Date, or such
other  agreement  as may be approved  by the  Bankruptcy  Court  pursuant to ss.
1129(b) of the Code after notice and a hearing.

         1.54.   "New  Prudential  Note  Amount"  shall  mean  the  sum  of  (i)
$97,400,000 (less any principal payments actually paid and applied to reduce the
amount of Class 2B Claims  during the Chapter 11 Case as a result of any sale of
Prudential  Real  Estate)  plus (ii) if the  Effective  Date occurs on or before
January 1, 1998, all interest accrued under the Existing  Prudential Facility at
the non-default rate through the Effective Date.

         1.55. "New Prudential Notes" shall mean the notes that are secured by a
first lien on the same collateral that secures the Existing  Prudential Facility
and are issued pursuant to the New Prudential Facility,  in the aggregate amount
of the New  Prudential  Note Amount,  which New  Prudential  Notes shall have an
interest  rate of LIBOR (as  defined  in the New  Prudential  Facility)  plus 4%
payable monthly in arrears,  a final maturity of the seventh  anniversary of the
Effective Date, yearly amortization,  commencing on the first anniversary of the
Effective  Date, of $4,000,000,  a default rate of LIBOR plus 6%, and such other
terms and conditions as are set forth in the New Prudential  Facility Term Sheet
attached  hereto as Exhibit D and such other  terms as are  satisfactory  to the
Debtor, the Required Existing Lenders, the Required Exit Lenders and the holders
of Class 2B Claims,  or such other terms and  conditions as are set forth in the
New Prudential Facility.


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         1.56. "New Synthetic Lease Facility" shall mean that certain  Financing
Agreement to be executed and delivered by the Company in favor of the holders of
Class 2C Claims (or the agent under the Existing  Synthetic  Lease  Facility for
their benefit),  in form and substance  satisfactory to the Debtor, the Required
Existing  Lenders and the Required  Exit  Lenders,  to be entered into as of the
Effective  Date,  or such other  agreement as may be approved by the  Bankruptcy
Court pursuant to ss. 1129(b) of the Code after notice and a hearing.

         1.57. "New Synthetic Lease Notes" shall mean the notes,  secured by the
Remaining Synthetic Lease Stores,  issued under the New Synthetic Lease Facility
in the aggregate  amount of the Remaining Store Value having an interest rate of
LIBOR (as defined in the New Synthetic  Lease  Facility) plus 2.05% per annum, a
maturity  of four and  one-half  years  after  the  Effective  Date and no prior
amortization,  or such other  terms and  conditions  as are set forth in the New
Synthetic Lease Facility.

         1.58.  "New Term  Notes"  shall mean the term loan notes  issued by the
Company pursuant to the Post-Consummation  Facility in an aggregate amount equal
to the sum of (i) $273,000,000  plus (ii) the excess, if any, of (a) $47,800,000
over (b) the Net Cash  Proceeds  from the sale or other  liquidation,  after the
Filing Date,  of  Designated  Collateral  securing the Allowed  Class 2A Claims,
which Net Cash  Proceeds  shall have been paid to any of the  holders of Allowed
Class 2A Claims on or prior to the Effective  Date in reduction of their Allowed
Class 2A Claims minus (iii) the lesser of (1) $8,000,000 and (2) the excess,  if
any,  of (a) the amount  calculated  pursuant to clause  (ii)(b)  above over (b)
$47,800,000. The New Term Notes shall be secured by the same collateral securing
the Exit Facility  (collectively,  the  "Collateral").  The New Term Notes shall
bear  interest  at a rate per annum equal to LIBOR (as defined in the New Credit
Agreement) plus 2.5%,  shall mature on November 30, 2002 and shall also have the
other terms and conditions as are set forth in the  Post-Consummation  Facility.
The rights of the holders of the New Term Notes with  respect to the  Collateral
shall be subject and  subordinate to all  obligations  owing with respect to the
Exit Facility.

         1.59. "Old Payless Common Stock" shall mean all authorized,  issued and
outstanding  shares of common stock, par value $0.01 per share, of the Debtor as
of the Filing Date.

         1.60. "Old Payless  Preferred Stock" shall mean all authorized,  issued
and outstanding shares of Cumulative Preferred Stock, par value $1.00 per share,
of the Debtor as of the Filing Date.

         1.61. "Payless" shall mean Payless Cashways, Inc., an Iowa corporation,
prior to its reorganization pursuant to the Plan.

         1.62. "Plan" shall mean this First Amended Plan of  Reorganization  and
all exhibits hereto,  which are incorporated herein by reference hereto, and any
amendments or modifications hereto.

         1.63.  "Post-Consummation  Facility"  shall  mean a term loan  facility
evidenced by the applicable  portions of the New Credit  Agreement,  pursuant to
which  the New Term  Notes  are to be


<PAGE> 9


issued,  having  substantially  the terms  described in Section II.B of the Term
Sheet attached hereto as Exhibit A.

         1.64.  "Prepetition" shall mean arising or accruing prior to the Filing
Date.

         1.65.   "Prepetition  Agent"  shall  mean,  CIBC  in  its  capacity  as
administrative and collateral agent under the Existing Credit Facility.

         1.66.  "Priority Status" shall mean the priority in distribution  which
is afforded to certain unsecured Claims pursuant to ss. 507(a) of the Code.

         1.67.  "Priority Tax Claims" shall mean all Claims that are entitled to
priority underss. 507(a)(8) of the Code.

         1.68.  "Pro Rata" shall mean:

         (a)    with respect to Allowed  Claims,  the same  proportion  that the
                Allowed  Amount of a Claim of a creditor  in any Class of Claims
                bears to the sum of:

                  (i) the  aggregate  Allowed  Amounts  of  all Claims  of  that
                      particular Class of Claims;  plus

                  (ii)the   aggregate   Face  Amounts  of  all  Claims  of  that
                      particular Class of Claims which are subject to dispute as
                      of the Distribution  Date, as reduced from time to time as
                      and to the  extent  that the  Disallowed  Amounts  of such
                      Claims are  determined  not to be allowed or to the extent
                      the  amounts   thereof  become  Allowed  Amounts  and  are
                      thereafter  included in the immediately  preceding  clause
                      (i);

         (b)    with respect to Disputed  Claims,  the same  proportion that the
                Face  Amount of a Disputed  Claim of a creditor  in any Class of
                Claims bears to the aggregate of:

                  (i) the    aggregate   Allowed   Amounts of all Claims of that
                      particular Class of Claims; plus

                  (ii)the   aggregate   Face  Amounts  of  all  Claims  of  that
                      particular Class of Claims which are subject to dispute as
                      of the Distribution  Date, as reduced from time to time as
                      and to the  extent  that the  Disallowed  Amounts  of such
                      Claims are  determined  not to be allowed or to the extent
                      the  amounts   thereof  become  Allowed  Amounts  and  are
                      thereafter  included in the immediately  preceding  clause
                      (i);

         (c)    with respect to Allowed Interests,  the same proportion that the
                Allowed Interest of an interest holder in any Class of Interests
                bears to the aggregate of:


<PAGE> 10


                  (i) the  aggregate Allowed Amounts  of  all  Interests of that
                      particular Class of Interest; plus

                  (ii)the  aggregate  Face  Amounts  of all  Interests  of  that
                      particular Class of Interests which are subject to dispute
                      as of the Distribution  Date, as reduced from time to time
                      as and to the extent that the  Disallowed  Amounts of such
                      Interests  are  determined  not  to be  allowed  or to the
                      extent the amounts  thereof become Allowed Amounts and are
                      thereafter  included in the immediately  preceding  clause
                      (i); and

         (d)    with respect to Disputed Interests, the same proportion that the
                Face Amount of a Disputed  Interest of an interest holder in any
                Class of Interests bears to the aggregate of:

                  (i) the  aggregate Allowed Amounts  of  all  Interests of that
                      particular Class of Interest; plus

                  (ii)the  aggregate  Face  Amounts  of all  Interests  of  that
                      particular Class of Interests which are subject to dispute
                      as of the Distribution  Date, as reduced from time to time
                      as and to the extent that the  Disallowed  Amounts of such
                      Interests  are  determined  not  to be  allowed  or to the
                      extent the amounts  thereof become Allowed Amounts and are
                      thereafter  included in the immediately  preceding  clause
                      (i).

         1.69.  "Prudential Real Estate" shall mean the real property subject to
those certain mortgages,  deeds of trust and other security  instruments granted
by the Debtor pursuant to the Existing Prudential Facility.

         1.70.  "Required  Existing  Lenders" shall mean financial  institutions
party to the Existing Credit Facility comprising more than one half in number of
all such financial institutions and holding at least two-thirds of the aggregate
amount of the Allowed Class 2A Claims.

         1.71.  "Required Exit Lenders" shall mean Exit Lenders holding at least
two-thirds of the aggregate commitments under the Exit Facility.

         1.72.  "Remaining  Store Value"  shall mean the value of the  Remaining
Synthetic Lease Stores, as determined pursuant to Section 3.4(c).

         1.73. "Remaining Synthetic Lease Stores" shall mean the Debtor's Stores
Nos. 248 (Bloomington, IN), 255 (Overland Park, KS) and 258 (S. Las Vegas, NV).

         1.74.  "Schedules"  shall mean the schedules of assets and  liabilities
filed by the  Debtor  with the  Bankruptcy  Court,  as they  may be  amended  or
supplemented  from time to time in accordance  with Rule 1009 of the  Bankruptcy
Rules.


<PAGE> 11


         1.75.  "Senior   Subordinated  Notes"  shall  mean  all  9-1/8%  Senior
Subordinated  Notes due April 15,  2003 issued and  outstanding  pursuant to the
Senior Subordinated Note Indenture as of the Filing Date.

         1.76.  "Senior  Subordinated  Note  Indenture"  shall mean that certain
Indenture of Trust dated April 20,  1993,  between the Debtor and the Trustee as
the same may have been subsequently amended, modified or supplemented.

         1.77.  "Subsequent  Allowance  Fraction"  shall mean, when applied to a
distribution  of  property  to be made by the Debtor  pursuant  to the Plan to a
holder  of a  particular  Subsequently  Allowed  Claim or  Subsequently  Allowed
Interest,  that fraction  having a numerator equal to the Allowed Amount of such
Subsequently Allowed Claim or Subsequently Allowed Interest, as the case may be,
and the  denominator  of which is the Face Amount of such  Subsequently  Allowed
Claim or Subsequently Allowed Interest, as the case may be.

         1.78.  "Subsequently  Allowed  Claim" shall mean any Claim for which an
Allowed Amount is fixed after the Effective Date.

         1.79. "Subsequently Allowed Interest" shall mean any Interest for which
an Allowed Amount is fixed after the Effective Date.

         1.80.  "Synthetic  Lease  Escrow"  shall  mean  the  account,  if  any,
established  to receive and hold any net cash proceeds  from the sale,  prior to
the Effective Date, of any Closed Synthetic Lease Stores.

         1.81. "Treatment Option" shall mean the alternative methods of treating
a secured Claim in a plan of  reorganization as provided in ss. 1124 of the Code
and set forth in Section  3.4(d) of the Plan, so that such Claim is not impaired
by the terms of such plan of reorganization.

         1.82.  "Trustee" shall mean United States Trust Company of New York, as
trustee under the Senior Subordinated Note Indenture.

         1.83.  "Underwriters"  shall  mean CIBC Wood  Gundy  Securities  Corp.,
NationsBank,  N.A., Goldman,  Sachs Credit Partners,  L.P, and Lehman Commercial
Paper Inc.

         1.84.   "Unsecured   Creditors'  Committee"  shall  mean  the  Official
Committee of Unsecured  Creditors appointed in the Chapter 11 Case by the United
States Trustee For The Western  District of Missouri,  as the membership of such
Committee is from time to time constituted and reconstituted.


<PAGE> 12


                                ARTICLE II.

                   CLASSIFICATION OF CLAIMS AND INTERESTS

         For  purposes  of the Plan,  Claims and  Interests  are  classified  as
follows:

         2.1. "Class 1 Claims" shall consist of all  Prepetition  Claims against
the Debtor  which are  entitled to Priority  Status,  other than  Administrative
Expenses and Priority Tax Claims.

         2.2.  "Class 2A Claims"  shall mean  claims  under or in respect of the
Existing Credit Facility.

         2.3.  "Class 2B Claims"  shall mean  claims  under or in respect of the
Existing Prudential Facility.

         2.4.  "Class 2C Claims"  shall mean  claims  under or in respect of the
Existing  Synthetic Lease Facility in an aggregate amount equal to the Remaining
Store Value.

         2.5. "Class 2D Claims" shall consist of all secured, Prepetition Claims
against the Debtor, each determined in accordance with ss.ss. 506(a) and 1111 of
the Code,  that are not  Allowed  Class 2A  Claims,  Class 2B Claims or Class 2C
Claims.

         2.6.  "Class 3A Claims"  shall  consist of all  unsecured,  Prepetition
Claims  against the Debtor not  entitled to Priority  Status,  including  Claims
under the Senior Subordinated Notes, other than Class 3B Claims.

         2.7.  "Class 3B Claims"  shall  consist of all  unsecured,  Prepetition
Claims  against the Debtor not entitled to Priority  Status in an Allowed Amount
not  greater  than  $1,000,  or as to which the holder  has  agreed in  writing,
pursuant  to an  election  set forth on the ballot  for  voting on the Plan,  to
reduce such Claim to $1,000 and to release  and waive any further or  additional
Class 3A Claims or Class 3B Claims against the Debtor.

         2.8.  "Class 4A  Interests"  shall consist of all shares of Old Payless
Preferred Stock,  together with any rights of the holders thereof to any accrued
dividends, and together with all claims arising from rescission of a purchase or
sale  thereof,  damages  arising  from  the  purchase  or sale  thereof,  or for
reimbursement  or contribution  allowed under Section 502 of the Code on account
of such a claim.

         2.9.  "Class 5A  Interests"  shall consist of all shares of Old Payless
Common Stock together with all claims  arising from  rescission of a purchase or
sale  thereof,  damages  arising  from  the  purchase  or sale  thereof,  or for
reimbursement  or contribution  allowed under Section 502 of the Code on account
of such a claim.


<PAGE> 13


                                  ARTICLE III.

                      TREATMENT OF CLAIMS AND INTERESTS

         3.1.   Treatment  of  Administrative   Expenses.   Each  holder  of  an
Administrative  Expense  shall be paid,  in  accordance  with  Articles IV and V
hereof, the Allowed Amount of such holder's Claim in full, in cash, under any of
the following clauses chosen at the option of the Debtor with the consent of the
Required  Existing  Lenders and the Required  Exit  Lenders in their  respective
judgments reasonably exercised,  (a) on the Effective Date, or (b) if payment is
before the Effective  Date, on such other date as the Bankruptcy  Court may fix,
or (c) in the  ordinary  course of business as said Claim  matures,  or (d) upon
such other less  favorable  terms as may be agreed  upon by such  holder and the
Debtor.

         3.2.  Treatment of Priority  Tax Claims.  Each holder of a Priority Tax
Claim shall be paid, consistent with ss. 1129(a)(9)(C) of the Code, under either
of the following  clauses chosen at the option of the Debtor with the consent of
the Required  Existing Lenders and the Required Exit Lenders in their respective
judgments reasonably exercised,  (a) the Allowed Amount of its Claim in full, in
cash,  on the  Effective  Date,  or (b) 10% of its Allowed  Priority  Tax Claim,
together with accrued and unpaid interest on the then outstanding amount of such
Allowed  Priority  Tax Claim at the  Market  Rate,  on each  anniversary  of the
Effective  Date  which  occurs  prior to the  sixth  anniversary  of the date of
assessment of such Allowed  Priority Tax Claim;  and the balance of such Allowed
Priority Tax Claim,  together  with accrued and unpaid  interest  thereon at the
Market Rate, on the sixth  anniversary of the date of assessment of such Allowed
Priority  Tax  Claim.  The Debtor  shall  have the right to prepay  any  Allowed
Priority Tax Claim,  in whole or in part, at any time,  without penalty and with
interest  accrued  and unpaid  thereon to the time of  prepayment  at the Market
Rate.

         3.3. Treatment of Prepetition  Priority Claims.  Class 1 Claims are not
impaired.  Each holder thereof shall be paid, in accordance with Articles IV and
V hereof,  the Allowed  Amount of its Claim in full,  in cash,  under any of the
following  clauses  chosen at the option of the Debtor  with the  consent of the
Required  Existing  Lenders and the Required  Exit  Lenders in their  respective
judgments reasonably exercised,  (a) on the Effective Date, or (b) if payment is
before the Effective  Date, on such other date as the Bankruptcy  Court may fix,
or (c) in the  ordinary  course of business as said Claim  matures,  or (d) upon
such other less  favorable  terms as may be agreed  upon by such  holder and the
Debtor.

         3.4.   Allowance and Treatment of Secured Claims

         (a)     Class 2A Claims shall be Allowed Claims, not subject to offset,
                 reduction or credit of any kind whatsoever,  in an amount equal
                 to the sum of (i) the aggregate  principal  amount  outstanding
                 under the  Existing  Credit  Facility  as of the Filing Date of
                 $417,368,409.58  plus (ii)  accrued  and  unpaid  interest  and
                 letter  of  credit  fees  and  other  fees  and  amounts  owing
                 (including,   without  limitation,  cash  management  fees  and
                 overdraft repayments),  if any, at the non-default  contractual
                 rate set forth in the Existing Credit Facility,  plus (iii) any
                 unpaid and reasonable out-of-pocket expenses


<PAGE> 14


                and reasonable fees and disbursements of all attorneys and other
                 advisors to the  Prepetition  Agent and the  Existing  Lenders,
                 minus  (iv) all  amounts  of Net Cash  Proceeds  of  Designated
                 Collateral paid to the Prepetition  Agent during the Chapter 11
                 Case  which  has  been  paid  to  the  Prepetition   Agent  for
                 application  to  reduce  the  amount  of the  Allowed  Class 2A
                 Claims,  plus (v) the amount of any increases  after the Filing
                 Date in the face amount of any letters of credit  issued  under
                 the Existing  Credit  Facility  pursuant to  provisions of such
                 letters  of credit as in effect  on the  Filing  Date.  Allowed
                 Class 2A Claims are impaired.  Consistent  withss.  1124 of the
                 Code,  each holder of Allowed  Class 2A Claims shall receive in
                 full satisfaction in respect thereof, on the Effective Date, in
                 accordance  with  Articles  IV  and  V  hereof,  such  holder's
                 allocable portion of:

                  (i) payment in full in cash in immediately  available funds of
                      all interest, fees, expenses and other amounts accrued and
                      owing to the Existing  Lenders and the  Prepetition  Agent
                      through the  Effective  Date  pursuant to or in connection
                      with the Existing Credit Facility or the Plan,  including,
                      without  limitation,  letter of credit fees and other fees
                      and amounts owing  (including,  without  limitation,  cash
                      management   fees  and  overdraft   repayments)   and  all
                      reasonable  out-of-pocket  expenses  and counsel and other
                      advisory  fees and  expenses  payable  under the  Existing
                      Credit Facility; and

                  (ii)payment in full in cash in  immediately  available  funds,
                      of the Net Cash Proceeds of Designated Collateral received
                      by the  Debtor  during  the  Chapter 11 Case to the extent
                      such Net Cash Proceeds have not  theretofore  been applied
                      to reduce the amount of the Allowed Class 2A Claims; and

                  (iii) the New Term Notes; and

                  (iv)10,800,000  shares of New Payless Common Stock;  provided,
                      however,   that  (1)  the   number  of  shares   otherwise
                      distributable to Allowed Class 2A Claims will be decreased
                      by a number  equal to the  quotient of (A) the excess,  if
                      any, of (I) the Net Cash  Proceeds  from the sale or other
                      liquidation,   after  the  Filing  Date,   of   Designated
                      Collateral  securing  the Allowed  Class 2A Claims,  which
                      proceeds  shall  have been paid to any of the  holders  of
                      Allowed Class 2A Claims on or prior to the Effective  Date
                      in reduction of their Allowed  Class 2A Claims,  over (II)
                      $55,800,000,  divided  by (B)  $9.19;  (2) the  number  of
                      shares otherwise  distributable to Allowed Class 2A Claims
                      will be decreased by a number equal to the quotient of (A)
                      the  excess,  if any,  of (I)  $420,000,000  over (II) the
                      aggregate amount of the Allowed Class 2A Claims (including
                      the face amount of any letters of credit outstanding under
                      the Existing  Credit  Facility)  outstanding on the Filing
                      Date  divided by (B)  $9.19;  (3)  460,000 of such  shares
                      shall be  distributed  to


<PAGE> 15


                      the  Exit  Lenders  on  a  pro  rata  basis  determined in
                      accordance with their respective Exit Facility commitments
                      on   the    Effective   Date,   and   such    distribution
                      shall   reduce   the   number   of  shares   received   by
                      each holder of an Allowed  Class 2A Claim on an  allocable
                      basis;  and (4) in the event  that  Class 3A,  Class 4A or
                      Class 5A  rejects  the Plan and to the  extent no  Adverse
                      Determination is made on or before the Confirmation  Date,
                      there  shall be  added  to the  number  of  shares  of New
                      Payless Common Stock  otherwise  distributable  to Allowed
                      Class 2A  Claims  under  this  clause  (iv) the  number of
                      shares of such Stock  otherwise  distributable  to Allowed
                      Class 4A Interests and/or Class 5A Interests to the extent
                      provided in Sections 3.6 and 3.7 of the Plan.

         (b)     Pursuant  to the  Plan,  Class 2B  Claims  are not  subject  to
                 offset,  reduction or credit of any kind whatsoever,  and shall
                 be deemed to be Allowed Claims,  in the aggregate  amount equal
                 to the sum of (i) the aggregate  principal  amount  outstanding
                 under the Existing Prudential Facility,  as of the Filing Date,
                 of  $97,400,000,  plus (ii) accrued and unpaid interest (at the
                 non-default  rate) and other fees and amounts owing (including,
                 without limitation,  reasonable  attorneys' fees and expenses),
                 as provided for under the Existing  Prudential  Facility  minus
                 (iii) any  principal  payments  actually  paid and  applied  to
                 reduce the amount of the Class 2B Claims  during the Chapter 11
                 Case as a result of any sale of Prudential  Real Estate.  Class
                 2B Claims are impaired.  Consistent  withss.  1124 of the Code,
                 each holder of an Allowed  Class 2B Claim shall receive in full
                 satisfaction  in respect  thereof,  on the  Effective  Date, in
                 accordance  with  Articles  IV  and  V  hereof,  such  holder's
                 allocable portion of:

                  (i) payment in full in cash in immediately  available funds of
                      all interest  (accrued at the non-default  rate), fees and
                      expenses  accrued  and owing as of the  Effective  Date in
                      accordance  with  the  terms  of the  Existing  Prudential
                      Facility  (including,  without limitation,  all reasonable
                      fees and  out-of-pocket  expenses of  counsel);  provided,
                      however,  that if the  Effective  Date occurs on or before
                      January 1, 1998 no such interest accruing on or before the
                      Effective  Date ("Subject  Interest")  shall be payable in
                      cash,  but rather all Subject  Interest  shall be added to
                      the original  principal amount of the New Prudential Notes
                      as provided in clause (iii) below;

                  (ii)payment in full in cash in immediately  available funds of
                      the proceeds of sale of Prudential Real Estate received by
                      the Debtor  during the  Chapter 11 Case to the extent that
                      such  proceeds have not  theretofore  been paid to holders
                      of, and applied to reduce the amount of, the Allowed Class
                      2B Claims; and

                  (iii) New  Prudential  Notes  pursuant  to the New  Prudential
                      Facility in an aggregate principal amount equal to the New
                      Prudential Note Amount.


<PAGE> 16


         (c)     Class 2C Claims are impaired.  Consistent  withss.  1124 of the
                 Code, each holder of an Allowed Class 2C Claim shall receive in
                 full satisfaction in respect thereof, on the Effective Date, in
                 accordance  with  Articles IV and V hereof,  such  holder's Pro
                 Rata  share of New  Synthetic  Lease  Notes.  At or before  the
                 hearing to consider the entry of the Confirmation Order, unless
                 the  following  shall have  theretofore  been  agreed to by the
                 Debtor,  the  holders  of  Class  2C  Claims  and the  Required
                 Existing  Lenders  and  the  Required  Exit  Lenders  in  their
                 respective  judgments  reasonably  exercised,   the  Bankruptcy
                 Court,  after  notice  and  a  hearing,   shall  determine  the
                 Remaining  Store  Value and the Closed  Store  Value.  Upon the
                 determination  of the Closed  Store  Value,  the  Debtor  shall
                 deliver to the  holders  of Allowed  Class 2C Claims (or to the
                 agent under the  Existing  Synthetic  Lease  Facility for their
                 benefit) a quitclaim  deed (or equivalent  instrument)  for the
                 Closed  Synthetic  Lease  Stores (or, in the case of any Closed
                 Synthetic Lease Store theretofore sold, the proceeds  contained
                 in any  Synthetic  Lease Escrow or, if  different,  cash in the
                 amount of the  Closed  Store  Value  with  respect to such sold
                 store),  and the claim in  respect  of the  Existing  Synthetic
                 Lease Facility  shall  thereupon be reduced by the Closed Store
                 Value.  The  remaining  amount of such claim  shall be divided,
                 with one part, equal to the Remaining Store Value, constituting
                 Class 2C  Claims,  and the  other  part  constituting  Class 3A
                 Claims.

         (d)    Class 2D Claims are not  impaired.  Consistent  with ss. 1124 of
                the  Code,  the  holder  of each  Allowed  Class 2D Claim  shall
                receive  treatment on the Effective  Date,  in  accordance  with
                Article  IV and V  hereof,  under any of the  following  clauses
                chosen  at the  option of the  Debtor  with the  consent  of the
                Required Existing Lenders and the Required Exit Lenders in their
                respective judgments reasonably exercised:

                      (i)  the Debtor  shall  execute a written  undertaking  in
                           favor of the holder of such  Class 2D Claim,  whereby
                           the Debtor  assumes  such Claim and leaves  unaltered
                           such holder's legal, equitable and contractual rights
                           with respect to such Claim; or

                      (ii) notwithstanding   any   contractual    provision   or
                           applicable law that entitles the holder of such Class
                           2D Claim to demand or receive  accelerated payment of
                           such Claim  after the  occurrence  of a default,  the
                           Debtor shall (1) cure any such default that  occurred
                           before or after the Filing Date, other than a default
                           of a kind specified inss.  365(b)(2) of the Code, (2)
                           reinstate the maturity of such Claim as such maturity
                           existed  before  such  default,  (3)  compensate  the
                           holder of such Claim for any  damages  incurred  as a
                           result of any  reasonable  reliance by such holder on
                           such  contractual  provision or such  applicable law,
                           and (4)  execute  a written  undertaking  in favor of
                           such  holder,  whereby the Debtor  assumes such Claim
                           and,  except as permitted in clauses (1), (2) and (3)
                           hereof, does not otherwise alter the legal, equitable
                           or contractual  rights of such holder with respect to
                           such Claim; or


<PAGE> 17


                      (iii)with the consent of the holder,  the Debtor shall pay
                           the holder  thereof Cash equal to the Allowed  Amount
                           of such holder's Class 2D Claim.

         (e)    Notwithstanding the foregoing, the holder of a Class 2B Claim, a
                Class 2C Claim or a Class 2D Claim may  receive  such other less
                favorable treatment as may be agreed upon by such holder and the
                Debtor.

         3.5.  Treatment  of  general  unsecured  Claims.  Class 3A  Claims  are
impaired.  Each holder of an Allowed Class 3A Claim shall receive, in accordance
with Articles IV and V hereof,  New Payless  Common Stock equal to such holder's
Pro Rata portion of the Class 3A Entitlement.

         3.6. Treatment of Claims of holders of Class 3B Claims. Class 3B Claims
are  impaired.  Each  holder  of an  Allowed  Class 3B Claim  shall be paid,  in
accordance  with  Articles IV and V hereof,  25% of the  Allowed  Amount of such
holder's Class 3B Claim, in cash, on the Effective Date.

         3.7.  Treatment of Old Payless Preferred Stock.  Class 4A Interests are
impaired.  Each holder of an Allowed Class 4A Interest shall, in accordance with
Articles IV and V hereof,  receive its Pro Rata share of 3% of all the shares of
New  Payless  Common  Stock to be issued  pursuant  to the Plan  (i.e.,  600,000
shares); provided, however, that the percentage of such New Payless Common Stock
to be distributed  to holders of Class 4A Interests  shall be (i) increased from
2% to 5% in the event of a rejection of the Plan by Class 5A and the  acceptance
of the  Plan by  Class  4A,  Class 3A and  Class  3B and  (ii)  decreased  to no
distribution  whatsoever  in the event of a  rejection  of the Plan by Class 4A,
Class 3A or Class 3B, in which  event all of the  shares of New  Payless  Common
Stock  otherwise  to be  distributed  to Class 4A Interest  holders and Class 5A
Interest holders shall instead be distributed to holders of (1) Allowed Class 2A
Claims  to the  extent an  Adverse  Determination  is not made on or before  the
Confirmation  Date,  or (2)  Allowed  Class 3A Claims to the  extent an  Adverse
Determination  is made on or  before  the  Confirmation  Date,  as  provided  in
Sections  3.4(a) and 3.5 of the Plan.  Holders of Class 4A  Interests  shall not
retain or receive any  additional  property  for or on account of their Class 4A
Interests.

         3.8.  Treatment of Old Payless  Common  Stock.  Class 5A Interests  are
impaired.  Each holder of an Allowed Class 5A Interest shall, in accordance with
Articles IV and V hereof,  receive its Pro Rata share of 2% of all the shares of
New  Payless  Common  Stock to be issued  pursuant  to the Plan  (i.e.,  400,000
shares); provided, however, that the percentage of such New Payless Common Stock
to be  distributed  to holders of Class 5A  interests  shall be  decreased to no
distribution  whatsoever upon rejection of the Plan by Class 5A, Class 4A, Class
3A or Class 3B, in which  event all of the shares of New  Payless  Common  Stock
otherwise  to be  distributed  to Class 5A  Interest  holders  shall  instead be
distributed to (i) holders of Allowed Class 4A Interests,  if Class 4A, Class 3A
and Class 3B votes to accept the Plan,  as  provided in Section 3.6 of the Plan,
or (ii)  holders  of (1)  Allowed  Class 2A  Claims  to the  extent  an  Adverse
Determination  is not made on or before the  Confirmation  Date,  or (2) Allowed
Class 3A Claims to the extent an Adverse  Determination is made on or before the
Confirmation Date, if Class 4A or Class 3A


<PAGE> 18


votes to reject the Plan,  as provided  in Sections  3.4(a) and 3.5 of the Plan.
Holders  of Class 5A  Interests  shall not  retain  or  receive  any  additional
property for or on account of their Class 5A Interests.

         3.9.  Treatment  of Stock  Options.  Any stock  option  relating to Old
Payless  Preferred  Stock or Old Payless Common Stock which is  outstanding  and
unexercised  on the Filing Date may be  exercised at any time on or prior to the
Confirmation  Date,  and  immediately  after the Effective  Date, all such stock
options shall be deemed to have been  cancelled and shall be of no further force
or effect.

         3.10. Changes in the Treatment of any Claims or Interests.  Any changes
or other  modifications to the treatment of any claim or interest under the Plan
must be acceptable to the Debtor, the Required Existing Lenders and the Required
Exit Lenders in their respective judgments reasonably exercised.

                                  ARTICLE IV.

                      DISTRIBUTION OF PROPERTY TO HOLDERS
                    OF ALLOWED CLAIMS AND ALLOWED INTERESTS

         4.1.  Distributions to holders of Administrative  Expenses and Priority
Tax Claims.  The Debtor  shall  distribute  to each holder of an  Administrative
Expense or a Priority Tax Claim for which an Allowed Amount has been  determined
as of the  Effective  Date,  an amount,  in cash,  equal to one hundred  percent
(100%) of the Allowed Amount of such holder's Claim,  unless such holder and the
Debtor have otherwise agreed on less favorable treatment of such Claim (in which
case such  holder  shall be paid in  accordance  with such  agreement),  and, in
either case, at such time as the Debtor elects pursuant to Section 3.1 or 3.2 of
the Plan.

         4.2.  Distributions  to  holders of Class 1 Claims.  The  Debtor  shall
distribute  to each  holder of a Class 1 Claim for which an  Allowed  Amount has
been  determined as of the  Effective  Date,  an amount,  in cash,  equal to one
hundred percent (100%) of the Allowed Amount of such holder's Claim, unless such
holder and the Debtor have otherwise agreed on less favorable  treatment of such
Claim  (in  which  case  such  holder  shall  be paid in  accordance  with  such
agreement),  and, in either case, at such time as the Debtor elects  pursuant to
Section 3.3 of the Plan.

         4.3.   Distributions to holders of Class 2 Claims: Secured Claims.

         (a)    Class 2A. The provisions of this Section 4.3(a) shall apply only
                to Allowed Class 2A Claims.  On the Effective  Date,  the Debtor
                shall distribute to each holder of a Allowed Class 2A Claim such
                holder's  allocable  portion (rounded in accordance with Section
                5.8 of the Plan) of the Class 2A Effective  Date  Payments,  New
                Term Notes and New Payless  Common  Stock to be  distributed  in
                accordance with the provisions of Section 3.4(a) of the Plan.


<PAGE> 19


         (b)    Class 2B. The provisions of this Section 4.3(b) shall apply only
                to Class 2B Claims.  On the  Effective  Date,  the Debtor  shall
                distribute  to each  holder  of a Class  2B Claim  for  which an
                Allowed  Amount has been  determined as of the  Effective  Date,
                such holder's  allocable  portion  (rounded in  accordance  with
                Section  5.8 of the  Plan) of the  payments  in cash and the New
                Prudential  Notes  to be  distributed  in  accordance  with  the
                provisions of Section 3.4(b) of the Plan.

         (c)    Class 2C. The provisions of this Section 4.3(c) shall apply only
                to Class 2C Claims.  On the  Effective  Date,  the Debtor  shall
                distribute  to each  holder  of a Class  2C Claim  for  which an
                Allowed  Amount has been  determined as of the  Effective  Date,
                such holder's Pro Rata share of the New Synthetic Lease Notes to
                be  distributed  in  accordance  with the  provisions of Section
                3.4(c) of the Plan.

         (d)    Class 2D. The provisions of each of the following subsections of
                this Section 4.3(d) shall apply only to distributions  made with
                respect to Class 2D Claims:

                  (i) Election of option. On or prior to the Effective Date, the
                      Debtor  shall  notify the holder of each Class 2D Claim in
                      writing as to the  Treatment  Option (each of which is set
                      forth in Section  3.4(d) of the Plan) which the Debtor has
                      elected in  accordance  with the  procedures  set forth in
                      Section 3.4(d) of the Plan.

                 (ii) Treatment  of  Class 2D  Claims  under  Section  3.4(d)(i)
                      election.  In the event the Debtor  elects,  in accordance
                      with  Section  3.4(d)  of the Plan to  treat a  particular
                      Class 2D Claim in accordance with Section 3.4(d)(i) of the
                      Plan, on the Effective  Date,  the Debtor shall execute an
                      undertaking  binding  it to repay  such  Class 2D Claim in
                      full,  in  accordance  with  the  tenor  and  terms of the
                      agreement  underlying  such  Class 2D Claim,  and  without
                      altering the legal,  equitable and  contractual  rights to
                      which such  Class 2D Claim  entitles  the holder  thereof,
                      including,  without  limitation,  the  retention  by  such
                      holder of the property of the Debtor securing such Claim.

                  (iii)Treatment  of  Class 2D Claim  under  Section  3.4(d)(ii)
                       election.  In the event the Debtor elects,  in accordance
                       with  Section  3.4(d)  of the Plan to treat a  particular
                       Class 2D Claim in accordance  with Section  3.4(d)(ii) of
                       the Plan, on the Effective Date (1) the Debtor shall cure
                       any defaults with respect to such Claim by making payment
                       to the  holder of such  Class 2D Claim of an  amount,  in
                       cash,  equal to the  Allowed  Amount  due in  respect  of
                       defaults, and (2) the Debtor shall execute an undertaking
                       binding  it to repay  such  Class  2D  Claim in full,  in
                       accordance  with the  tenor  and  terms of the  agreement
                       underlying  such  Class  2D  Claim,  without  (except  as
                       permitted by ss. 1124(2) of the Code) altering the legal,
                       equitable and  contractual  rights to which such Class 2D
                       Claim  entitles the holder  thereof,  including,


<PAGE> 20


                      without limitation, the retention  by such holder  of  the
                      property of the Debtor securing such Claim.  The execution
                      by the  Debtor  of such  undertaking  shall  automatically
                      reinstate  the  maturity  of such  Class  2D Claim as such
                      maturity existed immediately before occurrence of defaults
                      subject  to cure with  respect  to such Class 2D Claim and
                      any acceleration resulting therefrom.

                 (iv) Treatment  of Class 2D Claims  under  Section  3.4(d)(iii)
                      election.  In the event the Debtor  elects,  in accordance
                      with  Section  3.4(d)  of the Plan to  treat a  particular
                      Class 2D Claim in accordance  with Section  3.4(d)(iii) of
                      the  Plan,  on  the  Effective   Date,  the  Debtor  shall
                      distribute to each holder of a Class 2D Claim for which an
                      Allowed  Amount has been  determined  as of the  Effective
                      Date,  an amount,  in cash,  equal to one hundred  percent
                      (100%) of the  Allowed  Amount of such  holder's  Class 2D
                      Claim,  unless less  favorable  treatment of such Claim is
                      otherwise  agreed upon by such  holder and the Debtor,  in
                      which case such holder  shall be paid in  accordance  with
                      such agreement.

         4.4.  Distributions  to holders of Class 3A Claims;  general  unsecured
Claims. On the Effective Date (or as promptly thereafter as may be practicable),
the Debtor  shall  distribute,  to each  holder of a Class 3A Claim for which an
Allowed Amount has been  determined as of the Effective  Date, such holder's Pro
Rata share  (rounded  in  accordance  with  Section  5.8 of the Plan) of the New
Payless  Common Stock to be  distributed  in accordance  with the  provisions of
Section 3.5 of the Plan.

         4.5.  Distribution to holders of Class 3B Claims. On the Effective Date
(or as promptly thereafter as may be practicable),  the Debtor shall distribute,
to each  holder  of a Class  3B  Claim  for  which an  Allowed  Amount  has been
determined as of the Effective  Date,  an amount,  in cash,  equal to 25% of the
Allowed Amount of such holder's Class 3B Claims.

         4.6.  Distributions  to  holders  of Class 4A  Interests;  Old  Payless
Preferred  Stock.  On the  Effective  Date (or as promptly  thereafter as may be
practicable),  the Debtor shall distribute to each holder of a Class 4A Interest
for which an Allowed Amount has been  determined as of the Effective  Date, such
holder's Pro Rata share (rounded in accordance  with Section 5.8 of the Plan) of
the New Payless Common Stock,  if any, to be distributed in accordance  with the
provisions of Section 3.6 of the Plan.

         4.7. Distributions to holders of Class 5A Interests; Old Payless Common
Stock. On the Effective Date (or as promptly  thereafter as may be practicable),
the Debtor shall  distribute  to each holder of a Class 5A Interest for which an
Allowed Amount has been  determined as of the Effective  Date, such holder's Pro
Rata share  (rounded  in  accordance  with  Section  5.8 of the Plan) of the New
Payless  Common  Stock,  if  any,  to be  distributed  in  accordance  with  the
provisions of Section 3.7 of the Plan.


<PAGE> 21


         4.8. Stock Options. Any stock options referred to in Section 3.8 of the
Plan that have not been  exercised on or before the  Confirmation  Date shall be
deemed  to have  been  cancelled  and  shall be of no  further  force or  effect
immediately after the Effective Date.

         4.9.  Record Date.  For the purpose of  establishing  the  ownership of
Claims and  Interests  so as to determine  to whom  distributions  shall be made
under the Plan, the Debtor shall establish a record date therefor,  which record
date  shall  either be  approved  by the  Prepetition  Agent  and the  Unsecured
Creditors' Committee or by a Final Order.

                                 ARTICLE V.

               DISPUTED CLAIMS, DISPUTED INTERESTS, RESERVES
                 AND MISCELLANEOUS DISTRIBUTION PROVISIONS

         5.1.  Objections.  An objection to the allowance of a Claim or Interest
shall be in writing and may be filed with the Bankruptcy  Court by the Debtor or
by any other  party in  interest at any time on or before the later of (i) sixty
days after the Confirmation Date, or (ii) such other time period as may be fixed
by the Bankruptcy Court.

         5.2. Amendment of Claims. A Claim may be amended prior to the Effective
Date only as  agreed  upon by the  Debtor  and the  holder  of such  Claim or as
otherwise  permitted by the  Bankruptcy  Court and Bankruptcy  Rules.  After the
Effective  Date,  a Claim may be amended to decrease,  but not to increase,  the
Face Amount thereof.

         5.3.  Reserves  for  Disputed  Claims and  Disputed  Interests.  On the
Effective Date, unless the Bankruptcy Court otherwise  agrees,  the Debtor shall
establish a reserve account for the account of the holders of Disputed Claims or
Disputed  Interests,  and shall from time to time on or after the Effective Date
put into such reserve account that property (Cash and/or securities) which would
otherwise be  distributable  to such holders on or after the Effective Date were
such  Disputed  Claims or  Disputed  Interests  to be Allowed  Claims or Allowed
Interests  respectively,  on the Effective  Date or on such later dates on which
such distributions  would otherwise be made, or such other property (Cash and/or
securities) as the holders of such Disputed Claims or Disputed Interests and the
Debtor may agree  upon.  The Debtor  reserves  the right to seek an order of the
Bankruptcy  Court  estimating  the  amount  of any  Disputed  Claim or  Disputed
Interest  for the  purposes of making  distributions  into the  reserve  account
established  pursuant to this  Section  5.3.  The  property so reserved  for the
holder of such Disputed Claims or Disputed Interests shall be distributed to the
relevant holders,  only to the extent such Disputed Claims or Disputed Interests
are allowed,  and only after such Disputed  Claims become  Subsequently  Allowed
Claims or such Disputed Interests become Subsequently Allowed Interests.  To the
extent  interest is earned on reserved Cash,  such interest shall be held by the
Debtor as  additional  reserved Cash for the account of the holder for whom such
reserved  Cash is held;  reserved Cash shall be  distributed  to the holder of a
Subsequently  Allowed Claim in  accordance  with Section 5.5 of the Plan. To the
extent a permitted  dividend payment is received for or on account of a reserved
security,  such  dividend  payment  shall be held by the  Debtor  as  additional
reserved  property for the account of the holder for whom such reserved security
is held,  and shall be


<PAGE> 22


distributed  to such holder to the extent such  holder  becomes  entitled to the
reserved security with respect to which the dividend payment was received.

         5.4.  Investment of reserves.  Except as otherwise provided in an order
of the Bankruptcy  Court,  the Debtor shall deposit or invest all Cash held from
time to time in  reserve  consistent  with ss.  345 of the Code or as  otherwise
permitted by an order of the  Bankruptcy  Court dated as of the Filing Date,  in
each case consistent  with the DIP Facility,  giving due regard for the Debtor's
likely need for such monies to satisfy Subsequently Allowed Claims.

         5.5.  Distributions  to  holders  of  Subsequently  Allowed  Claims  or
Subsequently  Allowed Interests.  Unless another date is agreed on by the Debtor
and the  holder  of a  particular  Subsequently  Allowed  Claim or  Subsequently
Allowed  Interest,  the Debtor shall, on the later of the Effective Date and the
tenth (10th) day after the Allowed Amount of such theretofore  Disputed Claim or
Disputed Interest is determined,  distribute to such holder with respect to such
Subsequently  Allowed Claim or  Subsequently  Allowed  Interest (as the case may
be):

         (a)    Distribution of cash. To the extent such holder is entitled to a
                distribution of Cash,  that amount,  in Cash, from the Cash held
                in reserve  for such  holder  with  respect to such  theretofore
                Disputed Claim and, to the extent such reserve is  insufficient,
                from any other source of Cash otherwise available to the Debtor,
                equal to that amount of Cash which  would have been  distributed
                to such holder on the  Effective  Date (or on such other date or
                dates of  distribution  as  provided  in  Article  III) had such
                holder's Subsequently Allowed Claim been an Allowed Claim on the
                Effective  Date or on any such later date plus interest  thereon
                calculated  at the average rate of interest  actually  earned by
                the Debtor from time to time (net of any costs of investment) on
                all Cash  reserved  pursuant to Section 5.4 of the Plan from the
                Effective Date (or from such other date or dates of distribution
                as provided in Article  III)  through the date on or about which
                distribution is made to such holder; and

         (b)    Distribution  of New Payless  Common  Stock.  To the extent such
                holder is  entitled  to a  distribution  of New  Payless  Common
                Stock,  from the New Payless  Common  Stock held in reserve with
                respect  to  such   theretofore   Disputed  Claims  or  Disputed
                Interests,  that number of shares  (rounded in  accordance  with
                paragraph 5.8 of the Plan) of New Payless  Common Stock reserved
                equal to the number of shares  allocable to such holder based on
                the Face  Amount  of its  Claim or  Interest  multiplied  by the
                Subsequent Allowance Fraction.

Except as hereinabove  provided,  the holder of a Subsequently  Allowed Claim or
Subsequently  Allowed  Interest  shall not be  entitled  to any  interest on the
Allowed Amount of its Claim or Interest, regardless of when distribution thereon
is made to or received by such holder.

         5.6. Fluctuation in value of securities. The market value of securities
held in  reserve  for  distribution  by the Debtor is likely to  fluctuate;  the
Debtor does not represent or warrant that the value of any such  securities will
not decline after the Effective  Date (or after such other date of  distribution
as  provided  in  Article  III) or  otherwise  assume any risk of loss which the
holder of a


<PAGE> 23


Subsequently Allowed Claim or Subsequently Allowed Interest may suffer by reason
of any  decline in value of a reserved  security  pending  determination  of the
Allowed Amount of a Disputed Claim or Disputed  Interest.  Any  appreciation  or
depreciation in the value of any reserved securities shall be borne by the party
to whom such security is ultimately distributed.

         5.7. Excess reserves; Subsequent Distributions.  As each Disputed Claim
becomes a  Subsequently  Allowed  Claim,  the Debtor shall  become  obligated to
distribute on the next Distribution Date to the holders of Allowed Claims of the
Class that would have been  entitled to receive such  property had such Disputed
Claim  never  been  a  Disputed  Claim,  all  property  reserved  for,  but  not
distributed  to,  the  holder  of such  Subsequently  Allowed  Claim  (including
interest,  if any earned thereon) as a consequence of the Allowed Amount of such
Claim having been fixed at less than the Face Amount thereof.

         5.8. Rounding; Fractional Shares. Whenever any payment of a fraction of
a cent in Cash would otherwise be called for, the actual payment shall reflect a
rounding of such  fraction to the nearest whole cent  (rounding  down in case of
fractions of .5 or less).  Whenever  any  delivery of a fractional  share of New
Payless Common Stock shall  otherwise be called for, no such  fractional  shares
shall be so delivered,  but rather the  provisions of paragraph 5.13 of the Plan
shall be applicable.

         5.9.  Unclaimed  Property.  The  Debtor  shall  make  distributions  of
property to holders of Claims and Interests at those times and in the manner set
forth in the Plan.  Subject to the  provision of paragraph  5.16 of the Plan, in
the event that any  distribution of property  remains  unclaimed for a period of
two years (or if said second  anniversary  is not a Business  Day, then the next
Business  Day after said second  anniversary)  after it has been  delivered  (or
after  such  delivery  has  been  attempted)  or  otherwise  made  available  in
accordance with the Plan to the holder entitled thereto, such unclaimed property
shall, on the next Business Day after such second  anniversary,  be forfeited by
such holder,  whereupon all such unclaimed  property shall be distributed on the
next  Distribution Date to the holders of Allowed Claims or Allowed Interests of
the Class that would have been entitled to receive such property had such holder
theretofore entitled thereto never been such a holder.

         5.10.  Transmittal of distributed  property and notices.  Except as may
otherwise  be agreed to by the Debtor and the  holder of a  particular  Claim or
Interest,  any  property or notice to which such holder  shall  become  entitled
under the provisions of this Plan,  shall be delivered to such holder by regular
mail,  postage  prepaid,  in an envelope  addressed  to such holder as he or his
authorized agent may direct in a request filed, on or before the Effective Date,
with the Court (or filed, after the Effective Date, with the Company), but if no
such request is filed, to the address shown in the Debtor's Schedules,  or, if a
different address is stated in a proof of claim duly filed, to such address.  In
all cases where  delivery or  distribution  is  effectuated by mail, the date of
delivery or  distribution  shall be the date of mailing.  Property  delivered in
accordance with this paragraph will be deemed delivered to the holder regardless
of whether such  property is actually  received by such holder.  Notwithstanding
any  provision of the Plan to the  contrary,  any payment or other  distribution
which the Debtor is required,  by this Plan, to make to the holder of an Allowed
Claim on the Distribution Date or on any other date, shall be deemed timely made
if


<PAGE> 24


made on the  Distribution  Date or on such  other  date,  as the case may be, or
within three (3) Business Days thereafter;  however,  any interest  calculations
required to be made,  shall  continue to be made only  through the  Distribution
Date or such other date,  as the case may be.  Notwithstanding  the foregoing or
any other provision of the Plan,  Class 2A Effective Date Payments shall be made
by wire transfer on the Effective  Date without  offset,  reduction or credit of
any kind whatsoever.

         5.11. Full and final satisfaction. All payments and distributions under
this  Plan  shall be in full and final  satisfaction,  settlement,  release  and
discharge of all Claims and Interests.

         5.12.  Allocation of distribution  with respect to certain Claims.  All
payments  and  distributions  made under this Plan with  respect to a particular
Claim  shall be  allocated  first to the  principal  and then to the accrued and
unpaid  interest  components  of the  Allowed  Amount of such  Claim;  provided,
however,  that this Section 5.12 shall not be  applicable  to Class 1, Class 2A,
Class 2B, Class 2C or Class 2D.

         5.13. Fractional Shares and De Minimis Distributions. Whenever the Plan
would  require  the  distribution  to any  holder  of a Claim or  Interest  of a
fractional share of New Payless Common Stock, the fraction will not be issued to
the holder.  Instead, on the 180th day after the Effective Date, the Debtor will
pay to the  holder  Cash equal to the value of the  fractional  share the holder
would  otherwise  receive.  The  value of each  fraction  shall be  computed  by
multiplying  the  fraction by the  average of the closing  prices of New Payless
Common Stock on the Nasdaq National Market System (or, if the New Payless Common
Stock is not listed on the Nasdaq National Market System, such other listing for
such Stock as is otherwise obtained in accordance with Section 12.5 of the Plan)
for the period of twenty trading days ending on or immediately  before the 170th
day after the Effective Date.  Notwithstanding  any other provision of the Plan,
no distribution of less than $5 shall be made pursuant to this Section 5.13.

         5.14. De Minimis  Distributions.  Notwithstanding  any provision of the
Plan otherwise  requiring that a distribution be made of Cash and/or  securities
on any Distribution  Date, if the Company  determines that the amount of Cash or
quantity of securities required to be so distributed does not warrant (given the
anticipated  time and expenses to be incurred to  accomplish  the  distribution)
making such  distribution,  the Cash and/or securities  otherwise  available for
distribution shall be held by the Company and shall be added to the distribution
to be made on the next Distribution Date.

         5.15.  Cramdown.  In the event any Class of Claims  votes  against  the
Plan, and such Plan is not revoked or withdrawn in accordance  with Section 14.7
of the Plan,  the terms of this Plan may be  modified  or  amended by the Debtor
with the consent of the Required  Existing Lenders and the Required Exit Lenders
in their respective  judgments  reasonably  exercised to the extent necessary to
effect  a  "cramdown"  on such  dissenting  Class.  The  Debtor  may  make  such
modifications   or  amendments  to  this  Plan  with  such  consent,   and  such
modifications  or  amendments  shall be filed  with the Court and  served on all
parties  in  interest   entitled  to  receive  notice  of  the  hearing  on  the
confirmation of the Plan at least 10 days prior to such hearing.


<PAGE> 25


         5.16.  Surrender of Outstanding Securities.

         (a)    Except  as  otherwise   provided   herein,   each  holder  of  a
                certificated  security evidencing an Allowed Interest (including
                Class  4A  and  Class  5A)  shall  surrender  such  certificated
                security  to the  Debtor  or the  Company  with a duly  executed
                letter of transmittal.  No distribution  hereunder shall be made
                to or on behalf of any holder of such Interest  unless and until
                such certificated security is received or the nonavailability of
                such certificated security is established to the satisfaction of
                the  Debtor  or the  Company.  The  Debtor  or the  Company  may
                reasonably  require security and/or indemnity from the purported
                holder of such  certificated  security  to hold it  harmless  in
                respect of such certificated security and any distributions made
                in respect thereof.

         (b)    Each holder of an existing debt security  (including the holders
                of Class 2B Claims and the holders of Class 3A Claims in respect
                of the Senior  Subordinated Notes, but not including the holders
                of  Allowed  Class 2A  Claims)  and each  holder of an  existing
                security  with  respect  to a  Class  2C  Claim  will  surrender
                instruments representing such existing debt security or existing
                security held by it to the Debtor or the Company,  as applicable
                in exchange  for the  distributions  to be made to such  holders
                under the Plan. No  distribution  shall be made to any holder of
                such an existing debt security or existing security that has not
                so surrendered such instruments held by it, subject,  however to
                section 5.16(c).

         (c)    Any holder of a Claim  based on an  existing  debt  security  or
                existing  security which has been lost,  stolen,  mutilated,  or
                destroyed  shall,  in lieu of  surrendering  such  existing debt
                security  or existing  security  as provided in this  paragraph,
                deliver to the Debtor or the Company (i)  evidence  satisfactory
                to the Debtor or the Company of the loss,  theft,  mutilation or
                destruction of such existing debt security or existing  security
                and  (ii)  such  security  or  indemnity  as may  be  reasonably
                required by the Debtor or the  Company to save it harmless  with
                respect  thereto.  Upon compliance  with this  subparagraph by a
                holder of a Claim based on an existing debt security or existing
                security,  such holder shall,  for all purposes under this Plan,
                be deemed to have  surrendered  such  existing  debt security or
                existing security.

         (d)    Any holder of an existing debt security or existing security who
                shall not have  surrendered  or be  deemed  to have  surrendered
                instruments  representing its existing debt security or existing
                security within two years after the Effective Date shall receive
                no  distributions  on such  claim  under  this Plan and shall be
                forever barred from asserting any claim thereon.

         (e)    At any time after the  initial  distribution  to the  holders of
                existing debt securities or existing securities  contemplated by
                the Plan,  the Company  shall hold the New Payless  Common Stock
                not so  distributed  because  the  holder  of an  existing  debt
                security or existing  security has not surrendered to the Debtor
                or the Company its  instrument or certificate  representing  its
                existing  debt security or existing  security.


<PAGE> 26


                Until the second year after the Effective Date,  any property so
                held  by  the  Company  will be held in trust for the benefit of
                holders   of  existing  debt  securities or existing  securities
                entitled to receive such property.

         5.17. Disputed Payments.  If any dispute arises as to the identity of a
holder  of an  Allowed  Claim  or an  Allowed  Interest  who is to  receive  any
distribution,  the  Company  may, in lieu of making  such  distribution  to such
person,  make such  distribution  into an escrow  account until the  disposition
thereof  shall be  determined by the  Bankruptcy  Court or by written  agreement
among the interested parties to such dispute.

         5.18.  Withholding  Taxes.  Any federal or state  withholding  taxes or
other amounts required to be withheld under any applicable law shall be deducted
and withheld from any distributions hereunder.

         5.19.  Voting of Certain  Securities.  New Payless Common Stock that is
unclaimed or is property held in Disputed  Claims reserves shall be voted at any
meeting of the  stockholders  of the  Company in  proportion  to the vote of the
publicly held shares of New Payless Common Stock voted at any such meeting.

         5.20.  Claims  Incurred After the  Confirmation  Date.  Claims incurred
after the date and time of entry of the Confirmation  Order shall not be subject
to  application or proof of claim and may be paid by the Company in the ordinary
course of business and without further Bankruptcy Court approval.

                                ARTICLE VI.

                     MEANS OF IMPLEMENTATION OF PLAN

         6.1. On the  Effective  Date,  the  Corporate  Reorganization  shall be
effectuated  by  means of the  Agreement  and Plan of  Merger  to  reincorporate
Payless  under  the  laws of the  State  of  Delaware  becoming  effective.  The
Agreement and Plan of Merger shall authorize the issuance of a sufficient number
of shares of New Payless Common Stock to satisfy the Debtor's  obligations under
the Plan, and the Company's  certificate of  incorporation  shall be in form and
substance  similar to that to be annexed as Exhibit B to the Plan on or prior to
the  Confirmation  Date,  which  document  shall  be  satisfactory  in form  and
substance  to the Debtor,  the Required  Existing  Lenders,  the  Required  Exit
Lenders and the Unsecured  Creditors'  Committee in their  respective  judgments
reasonably  exercised.  The  Company's  bylaws  shall be in form  and  substance
similar  to  those to be  annexed  as  Exhibit  C to the Plan on or prior to the
Confirmation Date, which document shall be satisfactory in form and substance to
the Debtor,  the Required  Existing  Lenders,  the Required Exit Lenders and the
Unsecured   Creditors'   Committee  in  their  respective  judgments  reasonably
exercised.

         6.2. On the Effective  Date,  the Company shall continue to operate its
businesses, except as otherwise contemplated hereby.


<PAGE> 27


         6.3. On the Effective  Date,  the  conditions to closing under the Exit
Facility  shall be satisfied or waived by the  requisite  creditors  (if they so
elect in accordance  with the New Credit  Agreement) and the Exit Facility shall
become available to the Company for its financing requirements.

         6.4.  Payments  to be Made on Account of Allowed  Class 2A Claims.  The
manner of disposition of the inventory at the 29 stores to be closed pursuant to
the Business  Plan shall be  satisfactory  to the Required  Existing  Lenders in
their judgment  reasonably  exercised.  Notwithstanding any term or provision of
this Plan,  between the  Confirmation  Date and the Effective  Date,  the Debtor
shall  continue  to pay all  interest  (on a current  basis),  and the letter of
credit and other fees and amounts owing  (including,  without  limitation,  cash
management fees, overdraft repayments and all reasonable  out-of-pocket expenses
and  reasonable  attorneys' and advisors'  fees and  disbursements)  as adequate
protection to the holders of Allowed Class 2A Claims.

                                  ARTICLE VII.

                    CONDITIONS TO EFFECTIVENESS OF THE PLAN

         7.1. Conditions to Effective Date of Plan. Except as otherwise provided
in Section 7.2 of the Plan,  it shall be a condition  to the  occurrence  of the
Effective Date that:

         (a)    The Debtor and the Exit Lenders  shall have closed (as such term
                is used  therein) the Exit Facility  contemporaneously  with the
                Effective  Date  and all  conditions  thereto  shall  have  been
                satisfied or waived by the Exit Lenders;

         (b)    The DIP Facility  shall have  terminated,  and all amounts owing
                thereunder shall have been paid in full, in cash;

         (c)    The  Confirmation  Order  shall have been  entered,  in form and
                substance  acceptable  to  the  Debtor,  the  Required  Existing
                Lenders  and the  Required  Exit  Lenders,  in their  respective
                judgments  reasonably  exercised,  and shall have become a Final
                Order; and

         (d)    The   Corporate   Reorganization,   if  any,   shall  have  been
                consummated  substantially  contemporaneously with the Effective
                Date.

         7.2. Waiver of Conditions.  The conditions  contained in Section 7.1 of
the Plan may be  waived on or  before  the  Effective  Date by the  Debtor,  the
Required  Existing  Lenders and the  Required  Exit  Lenders  and the  Unsecured
Creditors'  Committee  in  their  respective  judgments  reasonably   exercised;
provided,  however, that the consent of the Unsecured Creditors' Committee shall
not be required for the waiver of the condition set forth in Section 7.1(c) that
the Confirmation  Order shall have become a Final Order;  and provided  further,
that the  condition  set forth in Section  7.1(d) may be waived on or before the
Effective  Date with the consent of the Debtor only.  To be  effective  any such
waiver must be in writing and filed with the Bankruptcy Court.


<PAGE> 28


                                  ARTICLE VIII.

                        TREATMENT OF EXECUTORY CONTRACTS

         8.1.  Assumption.   On  the  Confirmation  Date  (but  subject  to  the
occurrence of the Effective  Date),  the Debtor shall be deemed to have assumed,
in  accordance  with ss. 365 of the Code,  any and all  executory  contracts and
unexpired  leases to which the Debtor is a party,  except those which: (a) prior
to the Confirmation Date shall have been rejected;  (b) at the Confirmation Date
are the  subject of pending  motions to reject or are  included  on a list to be
delivered to the Bankruptcy  Court at or before the hearing on the  confirmation
of the Plan or (c) are stock  options  referred  to in Section 3.8 of the Plan .
The dollar  amount of any  monetary  default of the Debtor  existing  (as of the
Confirmation Date) under a particular unexpired lease or executory contract,  as
may be  agreed  to by  the  parties  thereto  or as  may  be  determined  by the
Bankruptcy Court, shall constitute an Administrative Expense upon the assumption
of such executory contract or unexpired lease.

                                   ARTICLE IX.

                            MANAGEMENT OF THE COMPANY

         9.1.   Officers and Directors.

(a)  On  the  Effective   Date,  the  Company's  Board  of  Directors  shall  be
reconstituted  to  consist  of  two  individuals  designated  by  the  Unsecured
Creditors'  Committee;  five  individuals  designated  by the Required  Existing
Lenders; and two individuals designated by the Board of Directors of the Debtor,
the term of each director to be acceptable to the Debtor, the Prepetition Agent,
the Required Existing Lenders and the Unsecured  Creditors'  Committee,  and the
identity of the directors  shall be disclosed at or prior to the hearing  before
the Bankruptcy Court to consider the confirmation of the Plan.

(b) The persons who will serve as the Chief Executive Officer, the President and
the Chief Financial Officer of the Company commencing on the Effective Date will
be disclosed at or prior to the hearing before the Bankruptcy  Court to consider
the  confirmation  of the Plan.  The  capability  and  expertise of all proposed
executive  officers and  directors of the Company  must be  satisfactory  to the
Prepetition Agent, the Required Existing Lenders and the Required Exit Lenders.

         9.2.  Management  Stock  Option  Program.   The  Company  may  adopt  a
management  stock option  program on terms  approved by the  Company's  Board of
Directors  providing  for  the  issuance  of  stock  options  to  the  Company's
management from time to time on or after the Effective Date exercisable into New
Payless Common Stock.


<PAGE> 29


                                   ARTICLE X.

                       WAIVER OF RIGHTS OF SUBORDINATION

         10.1.  Each  holder of a Claim  against the Debtor (a) by virtue of the
acceptance  of the Plan by the  requisite  majority  in number and amount of its
Class,  or (b) by virtue of the  acceptance of the Plan by such holder,  waives,
releases  and  relinquishes  any and all rights  arising  under any  Prepetition
subordination  agreement,  whether  arising out of contract or under  applicable
law, including, without limitation, ss. 510 of the Code (other than ss. 510(c)),
to the payment and  distributions of consideration  made or to be made under the
Plan  or  otherwise  to  any  other  holder  of  a  Claim  against  the  Debtor.
Notwithstanding  anything  contained  herein  to the  contrary,  all  rights  of
subordination  arising under ss. 509 of the Code shall be preserved and shall be
unaffected by operation of this Section 10.1 of the Plan.

                                   ARTICLE XI.

                   DISCHARGE; RELEASE OF CLAIMS AND COLLATERAL

         11.1.  Discharge;  Injunction.  Except  as  otherwise  provided  in the
Confirmation Order or in the Plan (e.g., with respect to Allowed Class 2A Claims
and  Allowed  Class 2B  Claims),  upon the  Effective  Date the Debtor  shall be
discharged,  pursuant  to ss.  1141(d)(1)  of the Code,  from all Claims and all
debts that arose before the  Confirmation  Date and from any liability of a kind
specified in ss. 502(g), ss. 502(h) or ss. 502(i) of the Code, whether or not:

         (a) a proof of the Claim is filed or deemed filed under  ss.502 of  the
Code;

         (b) such Claim is allowed under ss. 502 of the Code; or

         (c) the holder of such Claim has accepted the Plan.

In accordance  with ss. 524 of the Code, the discharge  provided by this Section
11.1 and ss. 1141 of the Code,  inter alia,  acts as an  injunction  against the
commencement  or  continuation  of any action,  employment  of process or act to
collect, offset or recover the Claims or Interests discharged hereby.

         11.2.  Release  of  collateral  for Class 2D Claims.  Unless  otherwise
agreed  between the Debtor and the holder of a particular  Class 2D Claim,  each
holder of a Class 2D Claim shall on or  immediately  before the  Effective  Date
turn over and  release to the Debtor any and all  property  of the Debtor  which
secures  such  holder's  Class 2D Claim.  Such  holder  shall  execute  whatever
documents or forms the Debtor may reasonably require to evidence, as a matter of
record, such holder's release of the collateral;  provided,  however,  that such
collateral  will be deemed  released for all  purposes,  whether or not any such
documents or forms have been executed. On the Confirmation Date, the property of
the  debtor-in-possession  shall revert to the Company free and clear of any and
all liens or encumbrances, except as otherwise provided in the Plan or as agreed
by the Debtor and the holder of a particular Class 2D Claim.


<PAGE> 30


         11.3. Revesting. Except as otherwise provided in the Confirmation Order
or in the Plan (e.g., with respect to Allowed Class 2A Claims,  Allowed Class 2B
Claims,  Allowed Class 2C Claims and Allowed Class 2D Claims),  on the Effective
Date all property  comprising  the estate  created in the Chapter 11 Case by ss.
541 of the Code  shall  revest in the  Company,  free and  clear of all  Claims,
liens,  charges,  encumbrances  and Interests of creditors  and equity  security
holders.  As of the Effective  Date,  the Company may operate its businesses and
use,  acquire  and  dispose of  property  and settle  and  compromise  claims or
interests  without  supervision of the Bankruptcy Court free of any restrictions
of the Code or Bankruptcy Rules, other than those restrictions expressly imposed
by the Plan, the Confirmation Order, the Post-Consummation Facility and the Exit
Facility.  Without  limiting the  foregoing,  the Company may pay the charges it
incurs after the Effective Date for reasonable professional fees, disbursements,
expenses or related support  services  without any application to the Bankruptcy
Court.

         11.4.  Release by the Debtor of certain  potential  claims. On the date
that is 10 days before the  Confirmation  Date, but subject to the occurrence of
the  Effective  Date,  the Debtor shall be deemed to have  released,  waived and
relinquished  any and all  rights  or  claims  they  may  have or had to  avoid,
pursuant to ss.ss. 544, 547 and 548 of the Code, any transfer made by the Debtor
of an interest in its property  prior to the Filing Date,  or to offset any such
right or claim against any Claim made or asserted against the Debtor;  provided,
however, that no such right or claim shall be deemed released in connection with
any adversary proceeding or contested matter pending on such 10th day before the
Confirmation Date.  Notwithstanding anything to the contrary contained herein or
in the Existing Credit Facility or the Exit Facility, any recoveries received by
or on behalf of the  Debtor  in  respect  of any such  adversary  proceeding  or
contested  matter  shall be used to  reduce  the  then  outstanding  balance  of
revolving  credit loans, if any, under the DIP Facility or the Exit Facility (as
the  case  may be)  (without  any  reduction  in the  amount  of the  commitment
thereunder) and the balance,  if any, shall be paid to the Debtor and used by it
for general corporate purposes.

         11.5. Survival of indemnification obligations; Maintenance of Liability
Insurance. The obligations of the Debtor to indemnify those directors, officers,
employees,  agents,  advisors,  professional  persons and representatives of the
Debtor,  who have served in such capacity  since the Filing Date and continue to
so  serve  on the  Confirmation  Date,  pursuant  to the  Debtor's  articles  of
incorporation,  bylaws and  applicable  statutes  in respect of all  present and
future actions,  suits and proceedings against any of such officers,  directors,
employees,  agents,  advisors,  professional persons and representatives,  based
upon any act or  omission  related  to  service  with or for or on behalf of the
Debtor,  shall not be discharged or impaired by  confirmation or consummation of
the Plan but shall survive unaffected by the reorganization  contemplated by the
Plan  as   obligations  of  the  Company,   regardless  of  such   confirmation,
consummation  and  reorganization.   To  the  extent  practicable,  the  current
directors and officers liability insurance policies maintained by the Debtor, or
replacement  policies affording  substantially  similar coverage and protection,
shall be continued in effect after the Effective Date by the Company.

         11.6. Certain other releases.  On the Confirmation Date, but subject to
the occurrence of the Effective Date:


<PAGE> 31


         (a)    each holder of a Claim or Interest whose Claim or Interest is in
                a Class in which one or more  members  receives  a  distribution
                under the Plan, shall be deemed, by virtue of such receipt under
                the  Plan,  to  have  unconditionally  waived,   discharged  and
                released  all rights,  claims and causes of action in respect of
                the Debtor and its business  affairs prior to the Effective Date
                that such holder had or might have had against any other  holder
                of a Claim or Interest  (including  such other holder's  agents,
                advisors,   professional   persons,   representatives,    parent
                corporations,  subsidiaries, affiliates, directors, officers and
                employees)  to the  extent,  but only to the  extent,  that such
                rights, claims or causes of action are capable of assertion in a
                derivative or other representative capacity;

         (b)    the  Debtor,   on  its  own  behalf,   unconditionally   waives,
                discharges and releases all rights,  claims and causes of action
                in respect of the Debtor and its business  affairs  prior to the
                Effective Date that the Debtor had or might have had against the
                Debtor's employees,  agents, advisors,  professional persons and
                representatives of the Debtor; and

         (c)    pursuant  toss.1141(d)  of the Code,  each  holder of a Claim or
                Interest  (i) who has  accepted  the Plan,  (ii) whose  Claim or
                Interest is in a Class that has accepted the Plan as  determined
                in   accordance   withss.ss.1126(c)   and   (d)  of  the   Code,
                respectively,  or that is  deemed to have  accepted  the Plan in
                accordance  withss.ss.1126(f)  of  the  Code,  or  (iii)  who is
                entitled to receive a distribution  of property  pursuant to the
                Plan, shall be deemed, by virtue of such holder's  acceptance of
                the Plan, acceptance of the Plan by such holder's Class, or such
                holder's  receipt of a distribution of property or acceptance of
                rights granted under the Plan, to have  unconditionally  waived,
                discharged and released all rights, claims, and causes of action
                that such holder had or might have had against the Debtor;

provided,  however, that (x) notwithstanding  anything to the contrary contained
in this Section  11.6,  neither the directors nor the officers of the Debtor are
released or discharged from any claims which any holder of any Claim or Interest
may have  against any such  director or officer,  (y) the  releases set forth in
this  Section  11.6 do not extend to  liabilities  with  respect to the  Payless
Cashways,  Inc.  Amended  Retirement  Plan (the  "Pension  Plan"),  and (z) such
waiver,  discharge  and  release  shall  not  apply to any debt  instruments  or
securities of the Debtor distributed pursuant to the Plan.

         11.7.  Release of Bank  Parties.  Notwithstanding  Section  11.6 of the
Plan, on the Confirmation Date, but as of, and subject to the occurrence of, the
Effective Date, the Debtor (on its own behalf, and on behalf of all the Debtor's
shareholders  derivatively)  and  every  holder  of a Claim or  Interest  hereby
irrevocably waive, release and discharge all current and former Existing Lenders
and DIP Lenders,  the  Underwriters,  the Prepetition  Agent,  the Agent and any
predecessor  Prepetition  Agent or Agent,  CIBC as  Hedging  Bank and  Letter of
Credit Bank under the Existing Credit  Facility,  the holders of Cash Management
Obligations under the Existing Credit Facility, the Fronting Banks under the DIP
Facility,  the former Foreign  Exchange Bank under the Existing Credit Facility,
and all  persons or  entities  who were their  respective  directors,  officers,


<PAGE> 32


employees,  agents,  advisors,  professional  persons,  representatives,  parent
corporations,  subsidiaries and affiliates  (collectively,  the "Bank Parties"),
from any and all causes of action,  claims and other  liabilities based upon any
act or  omission  related  to the Debtor and its  business  affairs,  including,
without  limitation,  any  extensions of credit or other  financial  services or
accommodations  made or not made to the Debtor prior to the Effective  Date. The
Confirmation  Order shall  specifically  provide for the foregoing  releases and
shall enjoin the  prosecution  of any such released  claim,  causes of action or
liability.

         11.8.  Survival of  obligations  pursuant to the Pension  Plan.  On the
Confirmation  Date and  thereafter,  the Debtor  shall  continue to maintain the
Pension  Plan  for  the  benefit  of its  employees  (including  complying  with
statutory  minimum funding  requirements).  Accordingly,  the obligations of the
Debtor with respect to the Pension Plan shall not be  discharged  or impaired by
confirmation  or  consummation  of the Plan but shall survive  unaffected by the
reorganization contemplated by the Plan as obligations of the Company.

                                ARTICLE XII.

                  PROVISIONS RELATING TO CORPORATE STRUCTURE
                       OF THE COMPANY UPON CONSUMMATION

         12.1. Certificate of Incorporation. The certificate of incorporation of
the Company shall, as of Effective Date, become effective as provided in Section
6.1 of the Plan. The certificate of incorporation of the Company shall as of the
Effective  Date be  amended,  consistent  with ss.  1123(a)(6)  of the Code,  to
prohibit the issuance of non-voting equity securities.

         12.2.  Cancellation of Agreements and Interests. On the Effective Date,
all Old Payless  Preferred  Stock,  Old Payless  Common Stock,  any  unexercised
rights to purchase Old Payless  Preferred  Stock or Old Payless Common Stock and
agreements  relating  to the  Existing  Credit  Facility  (except  to the extent
provided for in the New Credit Agreement),  the Existing Prudential Facility and
the  Existing   Synthetic  Lease  Facility  then  outstanding  (other  than  any
mortgages,  deeds of trust  and  security  and  pledge  agreements  which may be
amended and restated or otherwise  remain in effect)  shall be deemed  cancelled
and of no further force or effect,  except as evidence of the entitlement of the
holder  thereof to receive  distributions  of property from the Debtor under the
Plan.

         12.3.  Cancellation of Senior Subordinated Note Indentures.  The rights
and obligations of Payless under the Senior  Subordinated Note Indenture and the
Senior Subordinated Notes issued thereunder shall be terminated and cancelled as
of the Effective Date.

         12.4.  Cancellation of Stock Options.  Immediately  after the Effective
Date,  all stock options  referred to in Section 3.8 of the Plan shall be deemed
cancelled and of no further force or effect.

         12.5. Stock Trading. The Company shall use its best efforts to have the
New Payless Common Stock traded on the Nasdaq National Market System.


<PAGE> 33


         12.6. Corporate  Reorganization.  Substantially  contemporaneously with
the Effective Date, the Corporate Reorganization,  if any, shall be consummated.
As set forth in Section 14.12 of the Plan, no further action by  stockholders or
directors of Debtor or otherwise  shall be required in respect of the  Corporate
Reorganization.

                                 ARTICLE XIII.

                          RETENTION OF JURISDICTION

         13.1.  After the  Effective  Date,  the  Bankruptcy  Court shall retain
jurisdiction  of the Chapter 11 Cases pursuant to and for the purposes of ss.ss.
105(a) and 1127 of the Code and for the following purposes, inter alia:

         (a)    To consider any  modification  of the Plan under ss. 1127 of the
                Code;

         (b)    To determine  any and all  objections to the allowance of Claims
                and/or Interests;

         (c)    To  determine  any and all fee  requests of  professionals  made
                pursuant toss.ss. 330 and 503(b) of the Code;

         (d)    To   determine   any  and  all   applications   pending  on  the
                Confirmation   Date  for  the  rejection  and  disaffirmance  or
                assumption  or assignment  of executory  contracts,  or any such
                items  contained  in the list  referred to in Section 8.1 of the
                Plan, and the allowance of Claims resulting therefrom;

         (e)    To determine all controversies and disputes arising under, or in
                connection  with,  the  Plan  and  all  agreements  or  releases
                referred to in the Plan;

         (f)    To  determine  any and all  applications,  contested  matters or
                adversary  proceedings pending on the Confirmation Date or filed
                thereafter  seeking to  adjudicate  the relative  interests  and
                priorities  in  and  to  property  of  the  Debtor's  estate  or
                otherwise;

         (g)    To effectuate payments under, and performance of, the provisions
                of the Plan; and

         (h)    To determine  such other matters and for such other  purposes as
                may be provided for in the Confirmation Order.

                                     ARTICLE XIV.

                               MISCELLANEOUS PROVISIONS

         14.1.  Governing Law. Except to the extent the Code or Bankruptcy Rules
are  applicable,  the rights and  obligations  arising  under this Plan shall be
governed by and construed and enforced in accordance with, the laws of the State
of Missouri.


<PAGE> 34


         14.2. Headings. The headings of the Articles,  Sections and subsections
of this  Plan are  inserted  for  convenience  only and  shall  not  affect  the
interpretation of the Plan.

         14.3.  Successors and assigns.  This Plan and all the provisions hereof
shall be binding  upon and inure to the benefit of the parties  hereto and their
respective successors and assigns.

         14.4. Notices. Any notice,  demand, claim, or other communication under
this Plan  shall be in  writing  and shall be  deemed  to have been  given  upon
personal  delivery  thereof,  or upon the  fifth  (5th)  day  following  mailing
thereof,  if sent by registered mail, return receipt requested,  postage prepaid
to the last known address of the party to whom such notice is given.

         14.5.  Amendment and modification.

         (a)  Preconfirmation  Amendment.  The Debtor may modify the Plan at any
time  prior to the entry of the  Confirmation  Order,  with the  consent  of the
Required  Existing  Lenders and the Required  Exit  Lenders in their  respective
judgments  reasonably  exercised;  provided that the Plan, as modified,  and the
disclosure  statement   pertaining  thereto  meet  applicable   Bankruptcy  Code
requirements.

         (b) Postconfirmation Amendment Not Requiring Resolicitation.  After the
entry of the  Confirmation  Order,  the Debtor may modify the Plan to remedy any
defect or omission or to  reconcile  any  inconsistencies  in the Plan or in the
Confirmation Order, as may be necessary to carry out the purposes and effects of
the Plan, provided that: (i) the Debtor obtains approval of the Bankruptcy Court
for such  modification,  after notice and a hearing;  and (ii) such modification
shall not materially and adversely affect the interests,  rights,  treatment, or
distributions  of any Class of  Allowed  Claims or Allowed  Interests  under the
Plan.  Any waiver under  Section 7.2 of the Plan shall not be considered to be a
modification of this Plan and no further Court approval need be obtained.

         (c)      Postconfirmation/Preconsummation      Amendment      Requiring
Resolicitation. After the Confirmation Date and before the Effective Date of the
Plan,  the Debtor may modify  the Plan in a way that  materially  and  adversely
affects the interests,  rights, treatment, or distributions of a class of Claims
or  Interests;  provided,  however,  that:  (i) the  Plan,  as  modified,  meets
applicable Bankruptcy Code requirements;  (ii) the Debtor obtains Court approval
for such  modification,  after notice and a hearing;  (iii) such modification is
accepted by at least two-thirds in amount,  and more than one-half in number, of
Allowed Claims and by at least two-thirds in amount of Allowed  Interests voting
in each  Class  adversely  affected  by such  modification;  and (iv) the Debtor
complies with ss. 1125 of the Code with respect to the Plan as modified.

         14.6.  Severability.  Should any provision in the Plan be determined to
be  unenforceable,  such  determination  shall  in no way  limit or  affect  the
enforceability  and operative effect of any or all other provisions of the Plan.
In the event that any provision of the Plan would, by its inclusion in the Plan,
prevent or preclude the Bankruptcy  Court from signing the  Confirmation  Order,
the  Bankruptcy  Court,  on its own initiative or upon the request of a party in
interest,  may modify or amend or permit the  modification  or amendment of such
provision,  in whole or in part,  as  nec-


<PAGE> 35


essary to cure any defect or remove any  impediment to the  confirmation  of the
Plan  existing by reason of such  provision;  provided,  however,  that any such
modification or amendment shall in no way limit or affect the enforceability and
operative  effect of any or all other  provisions  of this  Plan;  and  provided
further that in the event of such  modification or amendment the Debtor reserves
its right to revoke and withdraw the Plan.

         14.7.  Revocation  and  Withdrawal.  The Debtor  reserves  the right to
revoke and  withdraw  this Plan prior to the  Confirmation  Date.  If the Debtor
revokes or withdraws this Plan, then this Plan shall be deemed null and void and
nothing  contained  herein shall be deemed to  constitute a waiver or release of
any claims by or against the Debtor or any other  person or to  prejudice in any
manner  the  rights of the  Debtor  or any  person  in any  further  proceedings
involving the Debtor.

         14.8.  Time. In computing  any period of time  prescribed or allowed by
this Plan, the day of the act or event from which the  designated  period begins
to run shall not be  included.  The last day of the period so computed  shall be
included,  unless it is not a Business Day, in which event the period runs until
the end of the next succeeding Business Day.

         14.9. Rules of Construction.  As used in the Plan, singular terms shall
include the plural,  plural  terms shall  include the  singular,  and  masculine
pronouns  shall  include  all  pronouns.  Unless  the  Plan  expressly  provides
otherwise,   the  rules  set  forth  in  ss.  102  of  the  Code  shall   govern
interpretation of the provisions of the Plan.

         14.10.  Consent.  Wherever the Plan requires  that a particular  act be
taken (or a  particular  act not be taken)  with the  consent  of any  person or
persons,  such  consent  shall be valid only if such  consent  has been given in
writing and has been signed by the person or persons  whose consent is required,
or by such  person's  or  persons'  duly  authorized  representative;  provided,
however,  that any  consents  given  pursuant  to Section 7.2 of the Plan may be
given orally at any court hearing at which a transcript is taken, in lieu of any
requirement  of a writing.  Consent given by a majority of the voting members of
the  Unsecured  Creditors'  Committee  shall be deemed to be the  consent of the
Unsecured Creditors'  Committee.  Consent given by the holders of Allowed Claims
and Allowed  Interests of a Class meeting the acceptance  standards set forth in
ss. 1126 of the Code shall be deemed to be the consent of such Class.

         14.11.   Dissolution  of  Unsecured  Creditors'  Committee  and  Equity
Committee. Except as otherwise provided in any order of the Bankruptcy Court, on
the later of the  Effective  Date or the date the new board of  directors  takes
office,  the  duties  of the  Unsecured  Creditors'  Committee  and  the  Equity
Committee shall terminate, except with respect to any appeal of any order in the
Chapter 11 Case,  fee  applications  and any  matters  related  to any  proposed
modifications of the Plan. Notwithstanding the foregoing, the financial advisors
to the Unsecured  Creditors'  Committee shall continue to be paid by the Company
through the Potential Standstill Period (as hereinafter defined) for purposes of
monitoring on behalf of trade  creditors  those  provisions of the Exit Facility
which provide,  upon the  satisfaction of certain  conditions,  for a thirty day
grace period with respect to financial  covenant  defaults,  if any,  during the
first two  fiscal  quarters  ending  after the  Effective  Date (the  "Potential
Standstill Period").


<PAGE> 36


         14.12.  Corporate  Action.  The  adoption  of any  new or  amended  and
restated  certificates of incorporation and by-laws of the Debtor or the Company
and the  other  matters  provided  for under the Plan  involving  the  corporate
structure  of the Debtor or the  Company  (including,  without  limitation,  the
Corporate Reorganization),  or corporate action, as the case may be, to be taken
by or required of the Debtor or the Company shall be deemed to have occurred and
be  effective  as provided  herein and shall be  authorized  and approved in all
respects, without any requirement of further action by stockholders or directors
of the Debtor or the Company. Without limiting the foregoing, the Debtor and the
Company  shall be  authorized,  without any further act or action  required,  to
issue all  securities  and any  instruments  required  to be  issued  hereunder,
including  sufficient  New Payless  Common  Stock in respect of any  exercise of
stock options referenced in Section 9.2 of the Plan.

         14.13.  Effectuating  Documents  and Further  Transactions.  The Debtor
shall  be  authorized  to  execute,  deliver,  file or  record  such  documents,
contracts,  instruments,  releases,  and other  agreements  and take such  other
action as may be  necessary  to  effectuate  and further  evidence the terms and
conditions of the Plan.

         14.14.  Limitation  of  Liability.  Neither the Debtor,  the  Unsecured
Creditors'  Committee  and the  Equity  Committee  (including  their  respective
members),  the Bank Parties,  nor any of their respective  officers,  directors,
employees, agents, advisors, professional persons and representatives shall have
or incur any liability to any entity for any action taken or omitted to be taken
in connection with or related to the  formulation,  preparation,  dissemination,
implementation,  confirmation,  or  consummation  of the  Plan,  the  Disclosure
Statement,  or any contract,  release, or other agreement or document created or
entered  into,  or any other action taken or omitted to be taken,  in connection
with the Plan; provided, however, that the provisions of this section shall have
no effect on the  liability of any entity that would  otherwise  result from any
action or omission to the extent that such action or omission is determined in a
final  order of a court of  competent  jurisdiction  to have  constituted  gross
negligence or willful misconduct.

         14.15.  Trustee's  Compensation.  The  Trustee  shall  be  entitled  to
receive,  out of the  distributions to be made pursuant to Section 4.4 or 4.5 of
the Plan to the  holders of Class 3A Claims or Class 3B Claims,  in each case in
respect of the Senior Subordinated Notes, such compensation for its services and
reimbursement  for its expenses  (including fees and expenses of its Counsel) as
shall  be  found  to be  reasonable  by the  Bankruptcy  Court  pursuant  to ss.
1129(a)(4)  of the Code.  To secure its right to receive the payments  described
above in this Section 14.15, the Trustee shall have a lien prior to the interest
of the holders of Class 3A Claims or Class 3B Claims, in each case in respect of
the Senior  Subordinated  Notes,  on all  distributions  to be made  pursuant to
Section 4.4 or 4.5 of the Plan to such  holders,  and in  connection  therewith,
notwithstanding  anything  to the  contrary  contained  in the  Plan,  all  such
distributions   shall  be  paid  by  the  Debtor  to  the  Trustee  for  further
distribution  by the  Trustee  to such  holders.  Such lien  shall  survive  the
satisfaction and discharge of the Senior Subordinated Note Indenture.


<PAGE> 37


Dated:  Kansas City, Missouri
         October 9, 1997

                                      Submitted by:

                                      PAYLESS CASHWAYS, INC.


                                      By:  /s/ David Stanley
                                         --------------------------------------
                                         David Stanley
                                         Chief Executive Officer