<PAGE> 1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                  For the quarterly period ended August 29, 1998

                                       or

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

                  For the transition period from             to

                  Commission file number 0-4437


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

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


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

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

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

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

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

There were 19,993,811 shares of Common Stock, $.01 par value, outstanding as of 
October  6, 1998.


<PAGE> 2


PAYLESS CASHWAYS, INC.

                         PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements.
<TABLE>

STATEMENTS OF OPERATIONS (Unaudited) (1)

<CAPTION>
                                                       Reorganized   | Predecessor           Reorganized  |   Predecessor
                                                         Company     |   Company               Company    |     Company
                                                    --------------------------------      -------------------------------
                                                         Thirteen    |  Thirteen             Thirty-nine  |   Thirty-nine
                                                        Weeks Ended  | Weeks Ended           Weeks Ended  |   Weeks Ended
                                                         August 29,  | August 30,            August 29,   |   August 30,
(In thousands, except per share amounts)                    1998     |    1997                  1998      |      1997
                                                    --------------------------------      -------------------------------
<S>                                                 <C>                <C>                <C>                <C>    

                                                                     |                                    |
Income                                                               |                                    |
     Net sales                                      $    523,508     | $    632,107       $   1,423,698   |  $  1,780,848
     Other income                                            908     |        1,191               2,688   |         3,660
                                                    --------------------------------      -------------------------------
                                                         524,416     |      633,298           1,426,386   |     1,784,508
                                                                     |                                    |
Costs and expenses                                                   |                                    |
     Cost of merchandise sold (2)                        393,021     |      478,038           1,059,901   |     1,309,378
     Selling, general and administrative                 112,382     |      148,166             336,748   |       437,720
     Reorganization items (7)                                 --     |        5,121                  --   |         5,121
     Special charges (2)                                     837     |       13,056               6,421   |        13,056
     Asset impairment charges (8)                             --     |       60,483                  --   |        60,483
     Provision for depreciation and amortization           7,835     |       12,768              25,002   |        38,609
     Interest expense (contractual interest of                       |                                    |
       $16,468 and $48,797 for the thirteen weeks                    |                                    |
       and thirty-nine weeks ended August 30, 1997,                  |                                    |
       respectively)                                       8,994     |       14,663              29,144   |        46,992
                                                    --------------------------------      -------------------------------
                                                         523,069     |      732,295           1,457,216   |     1,911,359
                                                    --------------------------------      -------------------------------
                                                                     |                                    |
INCOME (LOSS) BEFORE INCOME TAXES                          1,347     |      (98,997)            (30,830)  |      (126,851)
                                                                     |                                    |
Federal and state income taxes                               332     |      (33,595)             (7,615)  |       (40,085)  
                                                    --------------------------------      -------------------------------
                                                                     |                                    |
                               NET INCOME (LOSS)    $      1,015     | $    (65,402)      $     (23,215)  |  $    (86,766)
                                                    ================================      ================================
                                                                     |                                    |
                                                                     |                                    |
Weighted average common shares outstanding                20,000     |                           20,000   |
                                                    -----------------|                     ---------------|
                                                                     |                                    |
Net income (loss) per common share-basic (3)        $        .05     |                    $      (1.16)   |
                                                    =================                     =================
                                                                     |                                    |
Weighted average common and dilutive                                 |                                    |
     common equivalent shares outstanding                 20,004     |                           20,000   |
                                                    -----------------|                     ---------------| 
                                                                     |                                    |
Net income (loss) per common share-diluted (3)      $        .05     |                    $      (1.16)   |
                                                    =================|                     ===============|

<FN>

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



<PAGE> 3

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

                                                                               Reorganized                |  Predecessor
                                                                                 Company                  |    Company
                                                                ----------------------------------------- | ------------
                                                                  August 29,            November 29,      |  August 30,
(In thousands)                                                       1998                   1997          |     1997
                                                                --------------------------------------------------------
<S>                                                             <C>                    <C>                   <C>    
                                                                                                          |
ASSETS                                                                                                    |
                                                                                                          |
     CURRENT ASSETS                                                                                       |
       Cash and cash equivalents                                $      8,984           $      11,961      |  $    36,707
       Merchandise inventories (4)                                   376,739                 414,882      |      348,780
       Prepaid expenses and other current assets                      11,635                  14,705      |       14,930
       Income taxes receivable                                         9,649                  32,232      |       47,421
       Deferred income taxes                                           3,296                   8,665      |       12,733
                                                                --------------------------------------------------------
                                        TOTAL CURRENT ASSETS         410,303                 482,445      |      460,571
                                                                                                          |
     OTHER ASSETS                                                                                         |
       Real estate held for sale (8)                                  18,815                  48,562      |       44,321
       Cost in excess of net assets acquired, less                                                        |
         accumulated amortization of $112,332                                                             |
         at August 30, 1997 (8)                                           --                      --      |      268,120
       Deferred financing costs                                        3,570                   2,600      |       11,176
       Other                                                           8,010                  14,316      |       15,511
                                                                                                          |
     LAND, BUILDINGS AND EQUIPMENT                                   364,832                 363,418      |      719,173
       Allowance for depreciation and amortization                   (24,194)                     --      |     (275,011)
                                                                --------------------------------------------------------
         TOTAL LAND, BUILDINGS AND EQUIPMENT                         340,638                 363,418      |      444,162
                                                                --------------------------------------------------------
                                                                                                          |
                                                                $    781,336           $     911,341      |  $ 1,243,861
                                                                ========================================================

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



<PAGE> 4

<TABLE>

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

                                                                               Reorganized               |   Predecessor
                                                                                 Company                 |     Company
                                                                ---------------------------------------- | -------------
                                                                  August 29,           November 29,      |   August 30,
(In thousands)                                                       1998                  1997          |      1997
                                                                --------------------------------------------------------
<S>                                                             <C>                   <C>                   <C> 
                                                                                                         |
                                                                                                         |
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                     |
                                                                                                         |
     CURRENT LIABILITIES                                                                                 |
       Current portion of long-term debt                        $     10,143          $      9,354       |  $    465,372
       Trade accounts payable                                         44,446                75,583       |        17,991
       Other current liabilities                                     112,749               136,741       |       125,452
       Income taxes payable                                            7,436                 2,362       |         8,980
                                                                --------------------------------------------------------
                                   TOTAL CURRENT LIABILITIES         174,774               224,040       |       617,795
                                                                                                         |
     LONG-TERM DEBT, less portion                                                                        |
       classified as current liability (5)                           381,000               424,031       |            --
                                                                                                         |
     NON-CURRENT LIABILITIES                                                                             |
       Deferred income taxes                                          43,935                58,788       |        29,358
       Other                                                          21,042                20,682       |        21,462
                                                                                                         |
     LIABILITIES SUBJECT TO COMPROMISE                                    --                    --       |       372,158
                                                                                                         |
     SHAREHOLDERS' EQUITY (6)                                                                            |
       Common Stock, $.01 par value, 50,000,000 shares                                                   |
         authorized, 20,000,000 shares issued at                                                         |
         August 29, 1998, and November 29, 1997                          200                   200       |            --
       Preferred Stock, $1.00 par value, 25,000,000                                                      |
         shares authorized; issued:                                                                      |
           Cumulative Preferred Stock, 406,000 shares                                                    |
             issued and $83,372 aggregate liquidation                                                    |
             preference at August 30, 1997                                --                    --       |        40,600
       Common Stock, $.01 par value:                                                                     |
           Voting, 150,000,000 shares authorized,                                                        |
             39,964,041 shares issued at August 30, 1997                  --                    --       |           400
       Additional paid-in capital                                    183,600               183,600       |       487,851
       Accumulated deficit                                           (23,215)                   --       |      (325,763)
                                                                --------------------------------------------------------
       
                                  TOTAL SHAREHOLDERS' EQUITY         160,585               183,800       |       203,088
                                                                --------------------------------------------------------
                                                                                                         |
                                                                $    781,336          $    911,341       |  $  1,243,861
                                                                ========================================================

<FN>

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


<PAGE> 5

<TABLE>

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)

<CAPTION>

                                                                                Reorganized         |     Predecessor
                                                                                   Company          |       Company
                                                                             ---------------------- | --------------------
                                                                                 Thirty-nine        |     Thirty-nine
                                                                                 Weeks Ended        |     Weeks Ended
                                                                                  August 29,        |      August 30,
(In thousands)                                                                      1998            |         1997
                                                                             ---------------------------------------------
<S>                                                                          <C>                          <C>   
                                                                                                    |
Cash Flows from Operating Activities                                                                |
                                                                                                    |
     Net loss                                                                $         (23,215)     |     $   (86,766)
     Adjustments to reconcile net loss to net cash                                                  |
       provided by operating activities:                                                            |
         Depreciation and amortization                                                  25,002      |          38,609
         Asset impairment charges (8)                                                       --      |          60,483
         Deferred income taxes                                                          (9,484)     |         (11,359)
         Non-cash reorganization items (7)                                                  --      |           2,481
         Non-cash interest                                                                 530      |           2,500
         Other                                                                             385      |           2,048
     Changes in assets and liabilities                                                  12,078      |          54,747
                                                                             ---------------------------------------------
                                                                                                    |
     NET CASH PROVIDED BY OPERATING ACTIVITIES                                           5,296      |          62,743
                                                                                                    |
Cash Flows from Investing Activities                                                                |
                                                                                                    |
     Additions to land, buildings and equipment                                         (9,929)     |         (33,764)
     Proceeds from sale of land, buildings and equipment                                39,092      |          12,277
     Acquisition of business, excluding working capital:                                            |
       Purchase price in excess of net assets acquired                                      --      |          (1,015)
     Decrease (increase) in other assets                                                 6,306      |          (2,593)
                                                                             ----------------------------------------------
                                                                                                    |
     NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                35,469      |         (25,095)
                                                                                                    |
Cash Flows from Financing Activities                                                                |
                                                                                                    |
     Retirements of long-term debt                                                     (64,242)     |         (10,703)
     Net proceeds from revolving credit facility                                        22,000      |          13,461
     Financing fees                                                                     (1,500)     |          (3,320)
     Other                                                                                  --      |            (804)
                                                                             ----------------------------------------------
                                                                                                    |
     NET CASH USED IN FINANCING ACTIVITIES                                             (43,742)     |          (1,366)
                                                                             ----------------------------------------------
                                                                                                    |
     Net (decrease) increase in cash and cash equivalents                               (2,977)     |          36,282
     Cash and cash equivalents, beginning of period                                     11,961      |             425
                                                                             ----------------------- ---------------------
     Cash and cash equivalents, end of period                                $           8,984      |     $    36,707
                                                                             =============================================

<FN>

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



<PAGE> 6


NOTES TO CONDENSED FINANCIAL STATEMENTS

Thirty-nine weeks ended August 29, 1998, and August 30, 1997.

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

(2)    A special  charge of $0.8 million ($0.5  million after tax),  primarily a
       cash  charge,  was  recorded  in the  third  quarter  of  fiscal  1998 in
       connection  with the closing of three  stores.  In addition,  the Company
       recorded an inventory  write-down  of $1.3 million  ($0.8  million  after
       tax),  included in cost of merchandise sold, in connection with the store
       closings. The 1998 special charge includes:

                                      Amount          Amount            Reserve
                                     Charged         Utilized              at
       (In millions)                  1998        Through 8/29/98       8/29/98
                                  ----------------------------------------------

       Real estate disposal costs    $    0.7      $      --         $      0.7
       Other costs                        0.1             --                0.1
                                  ----------------------------------------------

                                     $    0.8      $      --         $      0.8
                                  ==============================================

       A special  charge of $13.1 million ($8.1 million after tax),  primarily a
       cash  charge,  was  recorded  in the  third  quarter  of  fiscal  1997 in
       connection  with  the  closing  of  twenty-nine  stores  as  part  of the
       Company's  reorganization  under  Chapter  11. In  addition,  the Company
       recorded an inventory  write-down  of $10.7  million  ($6.6 million after
       tax),  included in cost of merchandise sold, in connection with the store
       closings.

(3)    Basic net income (loss) per common share has been  computed  based on the
       weighted-average  number of common shares  outstanding during the period.
       Dilutive  net income  (loss) per common  share is  computed  based on the
       weighted-average  number of common  shares plus  potential  common shares
       outstanding during the period, when dilutive, consisting of certain stock
       options.  Given the net loss  reported  for the  thirty-nine  weeks ended
       August 29, 1998,  the impact of  considering  such stock options would be
       antidilutive.  Accordingly, diluted loss per common share for that period
       has been computed without  considering  such stock options.  Net loss per
       common share has not been presented for the  Predecessor  Company because
       Old  Preferred  Stock and Old Common  Stock were  canceled on December 2,
       1997,  under  the Plan of  Reorganization.  Presentation  of net loss per
       common share based on  Predecessor  Company  average  shares  outstanding
       would therefore not be meaningful.

(4)    Approximately 80% of the Company's  inventories are valued using the LIFO
       (last-in,  first-out) method.  Because inventory  determination under the
       LIFO  method is only  made at the end of each  fiscal  year  based on the
       inventory levels and costs at that time, interim LIFO determinations must
       necessarily  be based on  management's  estimates  of  expected  year-end
       inventory  levels and costs.  Since future  estimates of inventory levels
       and costs are subject to change,  interim  financial  results reflect the
       Company's most recent estimate of the effect of inflation and are subject
       to  final  year-end  LIFO  inventory  amounts.  If  the  FIFO  (first-in,
       first-out)  method of inventory  accounting had been used by the Company,
       inventories  would have been $1.0 million and $27.3  million  higher than
       reported at August 29, 1998, and August 30, 1997, respectively.


<PAGE> 7


(5) Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                        August 29,         November 29,         August 30,
       (In thousands)                                                      1998                1997                1997
                                                                      -----------------------------------------------------
       <S>                                                             <C>                 <C>                <C> 

       1997 Credit Agreement, variable interest rate                   $    294,283        $    317,133       $         --
       Mortgage loan, variable interest rate                                 95,736             102,010                 --
       Note payable, variable interest rate                                      --              13,000                 --
       Amended Credit Agreement                                                  --                  --            367,462
       Mortgage loan payable to insurance company                                --                  --             97,364
       Senior subordinated notes                                                 --                  --            173,655
       Other senior debt                                                      1,124               1,242              1,285
                                                                      -----------------------------------------------------
                                                                            391,143             433,385            639,766
       Less portion classified as current liability                         (10,143)             (9,354)          (465,372)
       Less portion classified as liabilities subject to
           compromise                                                            --                  --           (174,394)
                                                                      -----------------------------------------------------
                                                                       $    381,000        $    424,031       $         --
</TABLE>

       On August 13,  1998,  the Company  amended its 1997 Credit  Agreement  to
       modify various  covenants,  including required minimum cash flow (defined
       as earning  before  interest,  taxes and  depreciation,  (EBITD)) and the
       maximum  debt to EBITD  ratio.  At the end of the fiscal  year 1998,  the
       required  EBITD levels were decreased from $59.3 million to $44.6 million
       and from $74.5  million to $59.0  million at the end of fiscal year 1999.
       The maximum debt to EBITD ratio was increased  from 7.2/1 to 9.0/1 at the
       end of fiscal year 1998 and from 5.6/1 to 7.5/1 at the end of fiscal year
       1999.

(6)    During the first nine months of 1998,  the Company  granted stock options
       relating to 1,820,000 shares of common stock under the Payless  Cashways,
       Inc.  1998 Omnibus  Incentive  Plan.  The exercise  price for these stock
       options was the fair market  value of the Common Stock on the grant date.
       The  Company  has  accounted  for these stock  options  according  to APB
       Opinion No. 25, "Accounting for Stock Issued to Employees."

(7)    In  connection  with its Chapter 11 filing on July 21, 1997,  the Company
       recorded  reorganization  items of $5.1 million  during the quarter ended
       August  30,  1997.  Reorganization  items for this  period  consisted  of
       professional  fees of $2.8 million,  the write-off of deferred  financing
       costs of $2.5 million and interest income of $0.2 million.

(8)    The Company recorded an asset  impairment  charge of $60.5 million ($43.9
       million  after tax) in the third quarter of 1997.  This asset  impairment
       charge  was  recorded  after  considering  current  and  expected  future
       operating  cash flows for certain  stores  together with the proceeds the
       Company could expect to receive upon the sale of these assets.

       In 1997,  as a result  of the  impairment  charge,  certain  real  estate
       carrying  values were reduced $28.8  million,  goodwill was reduced $18.7
       million and a $13.0 million liability for future store lease payments was
       recorded.


<PAGE> 8


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

RESULTS OF OPERATIONS

Income

Net sales for the quarter ended August 29, 1998,  decreased  17.2% from the same
period of 1997 in total and 6.7% on a same-store  sales basis.  (Same stores are
those  open one full  year.)  Net  sales for the first  three  quarters  of 1998
decreased  20.1% from the same period of 1997 in total and 9.3% on a  same-store
sales  basis.  Management  believes  continuing  competitive  pressure  and  the
lingering  effects of the Chapter 11 filing have  contributed  to sales declines
throughout  1998.  Same-store  sales to professional  customers during the third
quarter of 1998 increased 4.0% and same-store sales to do-it-yourself  customers
declined  16.0 %. The Company  closed  thirty  stores  during the second half of
fiscal 1997 and three stores at the end of the 1998 second  quarter.  Sales from
these closed stores were $70.6  million and $230.4  million in the third quarter
and first three quarters of 1997, respectively. The Company plans to close three
more stores in the fourth quarter of 1998.

Costs and Expenses

Cost of merchandise sold as a percent of sales was 75.1% and 75.6% for the third
quarter of 1998 and 1997, respectively. For the first three quarters of 1998 and
1997,  cost of  merchandise  sold as a percent  of sales  was  74.4% and  73.5%,
respectively.  An inventory  write-down of $1.3 million ($0.8 million after tax)
related to the  closing of three  stores in the fourth  quarter of 1998 was 0.3%
and 0.1% of sales for the third  quarter and the first  three  quarters of 1998,
respectively. An inventory write-down of $10.7 million ($6.6 million after tax),
related to the closing of  twenty-nine  stores in connection  with the Company's
reorganization  under  Chapter  11,  was 1.7% and  0.6% of sales  for the  third
quarter and first three quarters of 1997, respectively. Excluding the effects of
inventory  write-downs  related  to  store  closings,  the  increase  in cost of
merchandise  sold as a percentage of sales for the third quarter and first three
quarters  of 1998 was  primarily  due to more  competitive  pricing  designed to
regain  customer  traffic lost during the Chapter 11 period  during fiscal 1997.
The  disruption  in the supply of product  resulting  from the Chapter 11 filing
caused some  increase in cost of goods sold for the third quarter of 1997 due to
purchasing product from secondary sources at higher costs.

Selling,  general and administrative  expenses were 21.5% and 23.5% of sales for
the third quarter of 1998 and 1997,  respectively.  For the first three quarters
of 1998 and 1997,  selling,  general and administrative  expenses were 23.7% and
24.6% of sales,  respectively.  Selling, general and administrative expenses for
the third quarter and first three quarters of 1998 decreased approximately $35.8
million and $101.0  million,  respectively,  compared to the same periods of the
prior year. The reductions in selling,  general and administrative expenses were
primarily the result of closed stores, as well as initiatives undertaken in 1998
to reduce store as well as corporate level personnel costs.

In connection with its Chapter 11 filing on July 21, 1997, the Company  recorded
reorganization  items of $5.1 million  during the quarter ended August 30, 1997.
Reorganization  items for this period  consisted  of  professional  fees of $2.8
million,  the write-off of deferred financing costs of $2.5 million and interest
income of $0.2 million.

A special  charge of $0.8 million  ($0.5  million  after tax),  primarily a cash
charge,  was  recorded  in the third  quarter  of 1998 to  reflect  real  estate
disposal  and other costs  related to the future  closing of three stores and an
administrative  center in the fourth  quarter of 1998. A special  charge of $5.6
million ($3.4 million after tax),  primarily a cash charge, was also recorded in
the first quarter of 1998 to reflect  severance costs related to the elimination
of staff at the Company's headquarters and regional  administrative  centers. In
the third  quarter  of fiscal  1997,  a special  charge of $13.0  million  ($8.1
million after tax), primarily a cash charge, was recorded to reflect real estate
disposal  and  severance  costs  related  to the future  closing of  twenty-nine
underperforming stores as part of the Company's reorganization under Chapter 11.

The Company recorded an asset impairment  charge of $60.5 million ($43.9 million
after tax) in the third quarter of 1997.  Primarily  because the environment for
building  materials  retailing  continued to be  increasingly  competitive,  the
Company conducted a review of underperforming stores and determined that certain
additional assets were impaired, including assets related to twenty-nine stores,
which the  Company  determined  to  close.  The asset  impairment  charges  were
recorded after considering  current and expected future operating cash flows for
certain  stores  together  with the proceeds the Company could expect to receive
upon the sale of these assets.


<PAGE> 9


The provision for  depreciation and amortization for the third quarter and first
three  quarters  of 1998  decreased  compared  to the same  periods  of 1997 due
primarily  to  goodwill  written-off  and  assets  written-down  in  fresh-start
reporting  related to the  Company's  emergence  from  bankruptcy.  In addition,
assets were removed from service in connection with the store closings mentioned
above.

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

The income tax  benefit for the first  three  quarters of 1998 was $7.6  million
compared to $40.1  million for the first three  quarters of 1997.  The effective
tax rates for both periods were  different from the 35% statutory rate primarily
due to  various  expenses  that are  permanently  non-deductible  for income tax
purposes.  The most  significant of these expenses was goodwill  amortization in
fiscal 1997.  Such tax  benefits  reflect  management's  estimates of the annual
effective  tax  rates  at the end of each  quarter  and are  subject  to  change
throughout the year.

Net Income (Loss)

Net income for the quarter ended August 29, 1998, was $1.0 million compared to a
net loss of $65.4  million for the same period of 1997.  Excluding the effect of
the third quarter 1998 and 1997 non-routine charges, net income was $2.7 million
for the  1998  quarter  compared  to a net  loss of $3.7  million  for the  1997
quarter. The third quarter improvement in 1998 was due to lower selling, general
and  administrative  expenses as well as a lower  depreciation  and amortization
provision and lower interest expense.  For the first three quarters of 1998, net
loss was $23.2  million  compared to $86.8  million for the same period of 1997.
Basic and diluted  income per common  share were $0.05 for the third  quarter of
1998,  while  basic and diluted  loss per common  share were $1.16 for the first
three quarters of 1998.  Excluding the 1998 and 1997  non-routine  charges,  net
loss for the first  three  quarters of 1998 would have been $17.4  million  with
basic and diluted loss per common  share of $0.87  compared to net loss of $25.1
million for the same period of 1997.

THE YEAR 2000 ISSUE

The Year 2000 issue is the result of computer  programs  being written using two
digits rather than four to define the  applicable  year.  Any programs that have
time-sensitive  software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failure or miscalculations.

The Company has  completed an  assessment  of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority.  Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant  systems.  All renovation
code and  system  replacements  are  being  unit-tested  as they are  completed.
Integrated  full-system  testing will begin in the first  quarter of 1999 and is
expected to continue  through the third  quarter of 1999. As of August 29, 1998,
code  renovation is 85% complete.  The Company expects that code renovation will
be 95% complete by January 1, 1999, and that all core business systems requiring
replacement   will  be  complete  by  mid-1999.   The  Company   estimates  that
expenditures  to  complete  execution  of the Year 2000 plan will  range from $4
million to $6 million. Most of such expenditures are being charged to expense as
incurred. The Company currently believes that it will complete all phases of the
plan without any material adverse consequences to its business,  operations,  or
financial condition.

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

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


<PAGE>10


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

LIQUIDITY AND CAPITAL RESOURCES

Cash  provided  by  operating  activities  was $5.3  million for the first three
quarters  of 1998  compared to $62.7  million for the same period of 1997.  Cash
provided  by  operating  activities  in  1997  was  significantly  greater  than
historical levels due to the balance sheet impact of the Chapter 11 filing. Cash
provided  by  operating  activities  in 1998 has  been  negatively  impacted  by
decreased  trade accounts  payable.  During the first three quarters of 1998 and
1997,  the Company used cash of  approximately  $2.4  million and $4.2  million,
respectively, in operating activities related to the execution of the 1997, 1996
and 1995  restructuring  plans and $10.2 million in the first three  quarters of
1998 for costs related to the Chapter 11 filing.  In addition,  the Company used
$5.4 million in the first three quarters of 1998 to pay severance  costs related
to  the  elimination  of  staff  at  the  Company's  headquarters  and  regional
administrative centers.

Borrowings  have been  available  under the 1997 Credit  Agreement to supplement
cash  generated by operations.  At August 29, 1998,  $74.1 million was available
for  borrowing  under the 1997  Credit  Agreement.  Working  capital  was $235.5
million  and  $258.4  million  at  August  29,  1998,  and  November  29,  1997,
respectively,  compared to a working capital deficit of $157.2 million at August
30,  1997.  The  working  capital  deficit  was due to the  reclassification  of
long-term debt as current,  partially offset by the  reclassification of current
liabilities as liabilities  subject to compromise.  The current ratios at August
29, 1998,  and November 29, 1997,  were 2.35 to 1, and 2.15 to 1,  respectively.
The  current  ratio at August  30,  1997,  was 0.7 to 1 due to the same  factors
causing the working capital deficit.

The Company's  primary  investing  activities are capital  expenditures  for the
renovation  of  existing  stores  and  additional  equipment.  The  1997  Credit
Agreement  governs  the amount of capital  expenditures  that can be made ($59.6
million in 1998,  $52.1 million in 1999, $41.2 million in 2000, $51.3 million in
2001 and $52.3 million in 2002).  The Company spent  approximately  $9.9 million
and  $34.8  million   during  the  first  three   quarters  of  1998  and  1997,
respectively,  for renovation of existing  stores and additional  equipment.  In
1997 the Company's capital expenditures also included expenditures for strategic
initiatives.  Budgeted  capital  expenditures for 1998 will be limited to normal
renovation of existing  stores and routine  equipment  purchases,  which will be
financed with funds  generated from  operations  and  borrowings  under the 1997
Credit  Agreement.  During the first three quarters of 1998, the Company sold 22
real estate  properties  related to stores  previously  closed for approximately
$39.1  million  of  cash  proceeds  which  were  applied  to  outstanding  debt.
Additionally,  in the first three  quarters of 1998,  the Company  received $5.8
million  from the  surrender  of certain life  insurance  policies  related to a
terminated benefit plan.

The Company's most significant financing activity is and will continue to be the
retirement of indebtedness.  As a result of the Company's  reorganization  under
Chapter 11, the indebtedness of the Company was reduced  significantly in fiscal
1997. Although the Company's  consolidated  indebtedness is and will continue to
be  substantial,  management  believes  that,  based  upon its  analysis  of the
Company's  financial  condition,  the cash flow generated from operations during
the past twelve  months and the expected  results of  operations  in the future,
cash flow from  operations  and  borrowing  availability  under the 1997  Credit
Agreement should provide sufficient  liquidity to meet all cash requirements for
the next twelve months  without  additional  financing,  subject to the possible
adverse  impact  of loan  covenants  described  below.  As a result  of the 1997
Chapter 11 filing, trade creditors have significantly shortened credit terms and
the  availability of trade credit cannot be assured.  The 1997 Credit  Agreement
contains a number of financial  covenants with which the Company must comply. On
On August 13,  1998,  the Company  amended its 1997 Credit  Agreement  to modify
various  covenants,  including  required  minimum cash flow  (defined as earning
before interest, taxes and depreciation,  (EBITD)) and the maximum debt to EBITD
ratio.  At the end of the fiscal  year 1998,  the  required  EBITD  levels  were
decreased  from $59.3  million to $44.6  million and from $74.5 million to $59.0
million at the end of fiscal  year 1999.  The  maximum  debt to EBITD  ratio was
increased  from 7.2/1 to 9.0/1 at the end of fiscal  year 1998 and from 5.6/1 to
7.5/1 at the end of fiscal year 1999.  Management currently expects that it will
achieve  compliance  with  these  covenants  throughout  fiscal  1998 and  1999;
however, factors beyond management's control,  including competitive conditions,
economic conditions,  supplier support,  lumber prices, and weather, could cause
noncompliance.  If compliance with these covenants is not achieved,  the Company
may be  required  to  renegotiate  its  existing  covenants  with  lenders or to
refinance   borrowings.   Success  in  achieving  any  such   renegotiations  or
refinancing,  or the specific terms thereof,  including interest rates,  capital
expenditure  limits or  borrowing  capacity,  cannot be assured.  If the Company
fails to achieve  compliance  with these  covenants  or, in the  absence of such
compliance,  if the Company  fails to amend such  financial  covenants  on terms
favorable to the Company, the Company may be in default under


<PAGE> 11


such covenants.  If such default occurred,  it would permit  acceleration of its
debt under the 1997 Credit Agreement  which, in turn, would permit  acceleration
of substantially all of the Company's other long-term debt.

FORWARD-LOOKING STATEMENTS

Statements  above  in  the  subsections  of  this  report  entitled  "Costs  and
Expenses," "The Year 2000 Issue" and "Liquidity and Capital  Resources," such as
"estimate", "believe", "expect," "anticipate," "intend" and similar expressions,
which are not historical,  are forward-looking statements that involve risks and
uncertainties.  Such  statements  include,  without  limitation,  the  Company's
expectation as to future performance.

Such forward-looking  statements are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform Act of 1995.  There are  certain
important  factors  that could  cause  results to differ  materially  from those
anticipated  by  the  forward-looking   statements  made  above.  Investors  are
cautioned that all  forward-looking  statements  involve risks and  uncertainty.
Among the factors that could cause actual  results to differ  materially are the
following: competitor activities; stability of customer demand; stability of the
work force; supplier support; consumer spending and debt levels; interest rates;
housing activity; lumber prices; product mix; growth of certain market segments;
an excess of retail space devoted to the sale of building materials; the success
of the Company's strategy;  and the success of the Company's remediation for the
Year 2000 issue.  Additional  information  concerning these and other factors is
contained in the Company's Securities and Exchange Commission filings, including
but not limited to the Form 10-K, copies of which are available from the Company
without charge or on the Company's web site, payless.cashways.com.

REVIEW BY INDEPENDENT ACCOUNTANTS

The condensed  consolidated  financial statements of Payless Cashways,  Inc. for
the thirteen week and thirty-nine  week periods ended August 29, 1998 and August
30, 1997, have been reviewed by KPMG Peat Marwick LLP, independent accountants.
Their report is included in this filing.


PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings.

         A group of terminated employees and others have filed a lawsuit against
the Company and other named  defendants in the United States  District Court for
the Southern  District of Iowa. (See the full description of the lawsuit in Item
3-Legal  Proceedings  contained  in the  Company's  Form 10-K for the year ended
November 29,  1997.) The lawsuit was brought in  connection  with a reduction in
force pursuant to a January 1994 restructuring.  The suit has asserted a variety
of  claims  including  federal  and  state  securities  fraud  claims,   alleged
violations of the Racketeer  Influenced  and Corrupt  Organizations  (RICO) Act,
federal  and  state  claims of age  discrimination,  alleged  violations  of the
Employment  Retirement Income Security Act of 1974, and various state law claims
including,  but not limited to, fraudulent  misrepresentation  allegations.  The
Company filed a motion to dismiss the majority of the claims; and Rulings and an
Order have been issued with respect thereto, substantially narrowing plaintiff's
legal  claims  by  dismissing  some  age  discrimination   counts,  all  federal
securities  fraud and RICO  counts  except  one each,  and all state law  counts
related to an alleged partnership.

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

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

<PAGE> 12


Item 5.  Other Information.

         The  Company  is  pursuing  a number of  opportunities  in an effort to
become the building materials and home improvement  supplier of first choice for
the professional builder, remodel and repair contractor, institutional buyer and
project-oriented  consumers.  Two  examples of these  opportunities  are a pilot
program  with a large  insurance  company in two of Payless' markets to  provide
materials for  the repair of damaged  property and arrangements with large  home
builders  in  three  other  markets to  supply  building  products and services,
including installed panels and trusses.

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

         a.     Exhibits.

                 3.1     Amended and Restated Bylaws of the Company.

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

                 4.1     First   amendment  to  Amended  and   Restated   Credit
                         Agreement  dated August 13, 1998,  among  Payless,  the
                         Banks  listed  on  the  signature   pages  thereof  and
                         Canadian Imperial Bank of Commerce, New York Agency, as
                         Coordinating and Collateral Agent.

                10.1*    Employment  agreement,  dated  as  of  August 31, 1998,
                         between Payless and Millard E. Barron.

                10.2*    Employment  agreement,  dated  as  of  August 25, 1998,
                         between Payless and Richard G. Luse.

                10.3*    Employment  agreement,  dated  as  of  August 25, 1998,
                         between Payless and Robert S. Islinger.

                10.4*    Employment  agreement,  dated  as  of  August 24, 1998,
                         between Payless and Stanley K. Boyd.

                10.5*    Employment  agreement,  dated  as  of  August 24, 1998,
                         between Payless and Louise R. Iennaccaro.

                10.6*    Form of Indemnification Agreement between  Payless  and
                         various officers and directors.

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

                27.1     Financial data schedule.

         b. Reports on Form 8-K.

                No reports on Form 8-K were filed by Payless  during the quarter
ended August 29, 1998.

*        Represents a management contract or a compensatory plan or arrangement.
       


<PAGE> 13


                                    SIGNATURE


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

                                     PAYLESS CASHWAYS, INC.
                                     (Registrant)


Date:  October 12, 1998               By:  s/Richard G. Luse
                                      ------------------------------------------
                                                   
                                      Richard G. Luse, Senior Vice President,
                                      Finance and Chief Financial Officer
                                      (Principal Financial Officer and Principal
                                      Accounting Officer)