<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 24, 1996

                                                         or

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

          For the transition period from                 to

          Commission file number 1-8210


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

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

Common Stock, $.01 par value, outstanding as of September 27, 1996:

              Voting                --       37,703,228    shares
              Non-Voting Class A    --        2,250,000    shares


<PAGE> 2

PAYLESS CASHWAYS, INC.

                                                          
                        PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (1)

<TABLE>
<CAPTION>


                                                         Thirteen Weeks Ended                  Thirty-Nine Weeks Ended
                                                    --------------------------------      --------------------------------
                                                       August 24,       August 26,          August 24,         August 26,
(In thousands, except per share amounts)                  1996             1995                1996               1995
                                                    -------------      -------------      --------------     -------------

<S>                                                 <C>                <C>                <C>                <C>
Income
     Net sales                                      $    723,793       $    737,237       $   1,932,812      $  2,005,134
     Other income                                          1,481              1,357               4,599             4,218
                                                    -------------      -------------      --------------     -------------
                                                         725,274            738,594           1,937,411         2,009,352

Costs and expenses
     Cost of merchandise sold (6)                        535,956            530,402           1,400,372         1,432,885
     Selling, general and administrative                 157,403            159,272             451,737           460,925
     Special charges (6)                                   8,184                --                8,184               --
     Asset impairment charges (5)                         59,697                --               59,697               --
     Provision for depreciation and amortization          14,007             15,567              40,777            45,339
     Interest expense                                     14,438             15,247              44,396            46,093
     Interest income (7)                                  (4,900)               --               (4,900)              --
                                                    -------------      -------------      --------------     -------------
                                                         784,785            720,488           2,005,163         1,985,242
                                                    -------------      -------------      --------------     -------------

               INCOME (LOSS) BEFORE INCOME TAXES         (59,511)            18,106             (62,852)           24,110

Federal and state income taxes (7)                       (36,633)             8,985             (38,217)           11,765
                                                    -------------      --------------     --------------     -------------

Income (loss) before equity in loss of joint
     venture                                             (22,878)             9,121             (24,635)           12,345

Equity in loss of joint venture                              --                (975)                --             (3,450)
                                                    -------------      -------------      --------------     -------------

                               NET INCOME (LOSS)    $    (22,878)      $      8,146       $     (24,635)     $      8,895
                                                    =============      =============      ==============     =============

Net income (loss) attributable to common stock      $    (24,388)      $      6,751       $     (29,077)     $      4,791
                                                    =============      =============      ==============     =============

Net income (loss) per common share (2)              $       (.61)      $        .17       $        (.73)     $        .12
                                                    =============      =============      ==============     =============

Weighted average common and dilutive
     common equivalent shares
     outstanding                                          39,952             40,116              39,939            39,969
                                                    =============      =============      ==============     =============


<FN>
See notes to condensed consolidated financial statements

</TABLE>


<PAGE> 3

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


                                                                  August 24,           November 25,            August 26,
(In thousands)                                                       1996                   1995                  1995
                                                                -------------          --------------        ------------
<S>                                                             <C>                    <C>                   <C>
ASSETS

     CURRENT ASSETS
       Cash and cash equivalents                                $        166           $         960         $     4,496
       Merchandise inventories (3)                                   399,373                 392,604             406,808
       Prepaid expenses and other current assets                      23,875                  29,375              27,444
       Income taxes receivable                                        15,200                     --                  --
       Deferred income taxes                                          14,505                  19,740              16,265
                                                                -------------          --------------        ------------
                                        TOTAL CURRENT ASSETS         453,119                 442,679             455,013

     OTHER ASSETS
       Real estate held for sale (5)                                  14,642                   6,082               5,458
       Cost in excess of net assets acquired, less
         accumulated amortization of $102,829
         $95,372 and $92,118, respectively (5)                       295,315                 323,819             428,548
       Deferred financing costs                                       10,002                  11,421              11,405
       Other                                                          15,325                  14,925              23,785

     LAND, BUILDINGS AND EQUIPMENT                                   788,642                 826,455             847,952
       Allowance for depreciation and amortization                  (277,948)               (280,945)           (261,041)
                                                                -------------          --------------        ------------

         TOTAL LAND, BUILDINGS AND EQUIPMENT                         510,694                 545,510             586,911
                                                                -------------          --------------        ------------

                                                                $  1,299,097           $   1,344,436         $ 1,511,120
                                                                =============          ==============        ============

<FN>
See notes to condensed consolidated financial statements

</TABLE>



<PAGE> 4

CONDENSED CONSOLIDATED BALANCE SHEETS - Continued (Unaudited) (1)

<TABLE>
<CAPTION>

                                                                  August 24,           November 25,           August 26,
(In thousands)                                                       1996                  1995                  1995
                                                                -------------         -------------         -------------

<S>                                                             <C>                   <C>                   <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

     CURRENT LIABILITIES
       Current portion of long-term debt                        $     16,713          $     31,472          $     18,627
       Trade accounts payable                                        148,748               159,844               160,178
       Other current liabilities (5)                                 172,621               146,278               136,362
       Income taxes payable                                            3,230                 6,685                22,280
                                                                -------------         -------------         -------------
                                   TOTAL CURRENT LIABILITIES         341,312               344,279               337,447

     LONG-TERM DEBT, less portion
       classified as current liability (4)                           611,332               608,627               641,458

     NON-CURRENT LIABILITIES
       Deferred income taxes                                          38,370                59,994                65,810
       Other                                                          23,891                23,373                23,461

     SHAREHOLDERS' EQUITY
       Preferred Stock, $1.00 par value, 25,000,000 
          shares authorized; issued:
           Cumulative Preferred Stock, 406,000 shares,
             $75.5 million aggregate liquidation preference           40,600                40,600                40,600
       Common Stock, $.01 par value:
           Voting, 150,000,000 shares authorized,
             37,705,628, 37,663,922, and 37,663,922
             shares issued, respectively                                 377                   376                   377
           Non-Voting Class A, 5,000,000 shares
             authorized, 2,250,000 shares issued                          23                    23                    23
       Additional paid-in capital                                    487,746               487,083               487,008
       Foreign currency translation adjustment                            --                    --                (2,589)
       Accumulated deficit                                          (244,554)             (219,919)              (82,475)
                                                                -------------         -------------         -------------
                        TOTAL SHAREHOLDERS' EQUITY                   284,192               308,163               442,944
                                                                -------------         -------------         -------------

                                                                $  1,299,097          $  1,344,436          $  1,511,120
                                                                =============         =============         =============

<FN>
See notes to condensed consolidated financial statements

</TABLE>


<PAGE> 5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (1)

<TABLE>
<CAPTION>
                                                                                         Thirty-Nine Weeks Ended
                                                                             ----------------------------------------------
                                                                                 August 24,                   August 26,
(In thousands)                                                                      1996                         1995
                                                                             ------------------           -----------------
<S>                                                                          <C>                          <C>
Cash Flows from Operating Activities

     Net income (loss)                                                       $         (24,635)           $         8,895
     Adjustments  to  reconcile  net  income  (loss)  to net  cash  
          provided  by operating activities:
               Depreciation and amortization                                            40,777                      45,339
               Asset impairment charges (5)                                             59,697                         --
               Deferred income taxes                                                   (17,260)                    (13,035)
         Non-cash interest                                                               1,800                       1,750
         Equity in loss of joint venture                                                   --                        3,450
         Other                                                                           1,578                         887
         Changes in assets and liabilities                                             (32,533)                     33,164
                                                                             ------------------           -----------------

     NET CASH PROVIDED BY OPERATING ACTIVITIES                                          29,424                      80,450

Cash Flows from Investing Activities

     Additions to land, buildings and equipment                                        (27,552)                    (53,726)
     Proceeds from sale of land, buildings and equipment                                12,649                         394
     Acquisition of business, excluding working capital
       Land, buildings and equipment                                                      (193)                         --
       Purchase price in excess of net assets acquired                                  (1,360)                         --
     Investment in joint venture                                                           --                       (9,254)
     Increase in other assets                                                             (972)                        (19)
                                                                             ------------------           -----------------

     NET CASH USED IN INVESTING ACTIVITIES                                             (17,428)                     62,605)
                                                                             ------------------           -----------------

Cash Flows from Financing Activities

     Retirements of long-term debt (4)                                                 (26,911)                    (14,315)
     Proceeds from long-term debt                                                       14,857                          --
     Sale of Common Stock under stock option plan                                           94                          16
     Other                                                                                (830)                     (1,730)
                                                                             ------------------           -----------------

     NET CASH USED IN FINANCING ACTIVITIES                                             (12,790)                    (16,029)
                                                                             ------------------           -----------------

     Net increase (decrease) in cash and cash equivalents                                 (794)                      1,816
     Cash and cash equivalents, beginning of period                                        960                       2,680
                                                                             ------------------           -----------------
     Cash and cash equivalents, end of period                                $             166            $          4,496
                                                                             ==================           =================

<FN>
See notes to condensed consolidated financial statements

</TABLE>



<PAGE> 6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirty-nine weeks ended August 24, 1996 and August 26, 1995.


(1)    The accompanying  condensed  consolidated  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   consolidated   financial   statements
       incorporated  by reference in the Company's  Form 10-K for the year ended
       November  25,  1995,  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 25, 1995, condensed  consolidated balance sheet has been derived
       from the audited consolidated financial statements as of that date.

(2)    Net  income  (loss)  per  common  share  has been  computed  based on the
       weighted  average number of common shares  outstanding  during the period
       plus common stock equivalents, when dilutive, consisting of certain stock
       options,  shares issuable under the Director  Deferred  Compensation Plan
       and  warrants.  For purposes of this  computation,  net income (loss) was
       adjusted for dividend requirements on preferred stock.

(3)    Approximately 83% 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  $31.7  million,  $27.5  million  and $27.9
       million  higher than  reported at August 24, 1996,  November 25, 1995 and
       August 26, 1995, respectively.

(4)    Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                  August 24,            November 25,           August 26,
       (In thousands)                                                1996                   1995                  1995
                                                                -------------          -------------          ------------
       <S>                                                             <C>                    <C>                    <C>
       Credit agreement                                         $    340,857           $    326,000           $   342,000
       Mortgage loan payable to insurance company                    112,154                138,987               142,949
       Senior subordinated notes - 9-1/8%                            173,655                173,655               173,655
       Other senior debt                                               1,379                  1,457                 1,481
                                                                -------------          -------------          ------------
                                                                     628,045                640,099               660,085
       Less portion classified as current liability                  (16,713)               (31,472)              (18,627)
                                                                -------------          -------------          ------------ 
                                                                $    611,332           $    608,627           $   641,458
                                                                =============          =============          ============
</TABLE>


       On October 3, 1996, the Company restructured and amended its $408 million
       credit  agreement to include two tranches of term loans in the  aggregate
       amount of $273 million, a revolving credit facility of $135 million and a
       $60 million working capital facility (the "Swingline  Facility") that can
       only be drawn upon if the  revolving  credit  facility is fully  utilized
       (the "Amended Credit  Agreement").  The Swingline Facility must be repaid
       in full prior to repaying any other part of the Amended Credit Agreement.
       The term loans require annual principal  payments of $3 million beginning
       on  September  15, 1997 with final  maturity on November  20,  2000.  The
       Amended  Credit  Agreement is secured by  substantially  all  merchandise
       inventory,  certain real estate,  and  substantially all of the equipment
       and  fixtures  of  the  Company.  All  loans  under  the  Amended  Credit
       Agreement,  except the $100  million  Tranche B loans,  bear  interest at
       fluctuating rates of either the alternate base rate (8-1/4% at August 24,
       1996) plus 1.5% per annum or LIBOR  (5-3/8% at August 24, 1996) plus 2.5%
       per annum.  The  Tranche B loans bear  interest at  fluctuating  rates of
       either the alternate  base rate plus 2.0% or LIBOR plus 3.0%. In addition
       to scheduled  repayments,  the Company will also be required to repay the
       term loans  with  proceeds  of  certain  asset  sales and  certain  other
       transactions and with excess cash flow, as defined.

       The Amended Credit Agreement  contains a number of covenants,  including,
       but not  limited  to,  minimum  cash flow  (defined  as  earnings  before
       interest,  taxes,  depreciation,  amortization,  and rent, "EBITDAR"),  a
       maximum debt to




<PAGE> 7

       EBITDAR ratio,  and limitations on capital  expenditures  and capitalized
       leases.  The  Company is also  prohibited  from paying  dividends  on its
       common and preferred stock.

(5)    The Company adopted Financial  Accounting  Standard No. 121,  "Accounting
       for the Impairment of Long-Lived  Assets and for Long-Lived  Assets To Be
       Disposed Of," in the third quarter of 1996.  Primarily as a result of the
       increasingly  competitive  environment for building materials  retailing,
       the  Company  conducted  its review and  determined  certain  assets were
       impaired.  These assets included  certain real estate,  including  future
       store lease obligations, and associated goodwill which is attributable to
       those assets and which was  established  in 1988 as part of the Company's
       leveraged  buyout.  An asset  impairment  charge of $59.7 million  ($44.6
       million after tax) 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.  As a
       result of the  impairment  charge,  goodwill was reduced  $22.4  million,
       certain  real estate  carrying  values were reduced  $25.7  million and a
       $11.6  million  liability  for future store lease  payments,  net of $6.0
       million in amounts the Company estimates to be recoverable, was recorded.

(6)    A special  charge of $8.2 million ($5.0  million after tax),  primarily a
       cash  charge,  was  recorded  in the  third  quarter  of  fiscal  1996 in
       connection with the future closing of nine  underperforming  stores.  The
       Company also  recorded an  inventory  write-down  of $5.8  million  ($3.5
       million after tax),  included in cost of merchandise  sold, in connection
       with the store closings. The special charge includes:

<TABLE>
<CAPTION>


                                                  Amount                     Amount                  Reserve
                                                  Charged                   Utilized                   at
              (In millions)                        1996                  Through 8/24/96             8/24/96
                                               -------------         ---------------------         -----------

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

              Future store rentals                $   3.7                  $    --                   $   3.7
              Real estate disposal costs              4.5                       --                       4.5
                                                  -------                  -------                   -------
                                                  $   8.2                  $    --                   $   8.2
                                                  =======                  =======                   =======
</TABLE>



              Historical financial data for the nine closed stores is as follows
              for the thirty-nine week periods presented:


<TABLE>
<CAPTION>

              (In thousands)                                1996                       1995
                                                            ----                       ----

              <S>                                       <C>                          <C>
              Net sales                                 $  45,487                    $  51,388
              Net operating loss                        $  (3,245)                   $    (857)
</TABLE>


(7)    On August 20, 1996,  the Small  Business Job  Protection  Act of 1996 was
       signed into law.  Certain  provisions  of this Act clarify the Tax Reform
       Act of 1986 and make  retroactively  tax  deductible  certain  costs  and
       expenses  previously  recorded  by the  Company  without  any related tax
       benefit. In addition,  the Company has recently settled with the Internal
       Revenue Service regarding  several tax issues.  As a result,  the Company
       has recorded a tax benefit of $23.7 million and related  interest  income
       of $4.9 million  ($2.9  million  after tax) in the third quarter of 1996.
       This tax benefit includes  recoverable  income taxes of $10.0 million and
       non-cash tax benefits of $13.7 million




<PAGE> 8

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


FINANCING ACTIVITIES


On October 3, 1996,  the Company  amended its $408 million  credit  agreement to
include two tranches of term loans in the aggregate  amount of $273  million,  a
revolving  credit  facility of $135  million and a $60 million  working  capital
facility (the "Swingline Facility") that can only be drawn upon if the revolving
credit  facility  is  fully  utilized  (the  "Amended  Credit  Agreement").  The
Swingline  Facility  must be repaid in full prior to repaying  any other part of
the Amended Credit Agreement. All facilities mature in November 2000. As part of
the amendment,  the availability of funds for capital expenditures has increased
(to $64  million  in 1997,  $81  million in 1998,  $100  million in 1999 and $59
million in 2000), additional collateral (including substantially all merchandise
inventory) was added, various covenants were modified or eliminated and interest
rates were  increased.  The  Amended  Credit  Agreement  is designed to give the
Company   additional   flexibility  and  liquidity  in  order  to  continue  the
implementation  of its  strategic  plan and  provide  the banks with  additional
security.


RESULTS OF OPERATIONS


Income

Net sales for the quarter  ended  August 24, 1996  decreased  1.8% from the same
period of 1995 in total and 0.6% on a comparable-store sales basis.  (Comparable
stores are those open one full year.) Net sales for the first three  quarters of
1996  decreased  3.6% from the same period of 1995 in total and on a  comparable
store sales basis. Sales for the third quarter reflect competitive  pressures in
certain markets  although there was strong growth in business from  professional
customers  and  improving  trends in the  consumer  segment.  Positive  external
conditions,  such as housing activity and consumer sentiment,  supported a sales
trend in which  sales for each  month of the  third  quarter  improved  over the
preceding  month.  Six stores  were closed  during the first  quarter of 1996 in
connection with the restructuring  plan announced in the fourth quarter of 1995.
Those six stores  accounted  for $4.9 million and $49.5  million of sales in the
first  three  quarters  of 1996 and 1995,  respectively.  During the first three
quarters of 1995, the Company opened five new stores and sold two stores. No new
stores were opened in the first three quarters of 1996.


Costs and Expenses

Cost of merchandise sold as a percent of sales was 74.1% and 72.0% for the third
quarter of 1996 and 1995, respectively. For the first three quarters of 1996 and
1995,  cost of  merchandise  sold as a percent  of sales  was  72.5% and  71.5%,
respectively.  An inventory write-down of $5.8 million ($3.5 million after tax),
related to the future closing of nine underperforming  stores, was 0.8% and 0.3%
of sales for the third quarter and first three  quarters of 1996,  respectively.
The remainder of the increase for the third quarter and the first three quarters
of 1996 was primarily due to the Company's pricing initiatives.

Selling,  general and administrative  expenses were 21.7% and 21.6% of sales for
the third quarter of 1996 and 1995,  respectively.  For the first three quarters
of 1996 and 1995,  selling,  general and administrative  expenses were 23.3% and
22.9% of  sales,  respectively.  The  increase  as a  percent  of sales for both
periods of 1996 was due  primarily to lower  sales.  The decrease in dollars for
both periods of 1996 was due primarily to savings from the six closed stores.

A special  charge of $8.2 million  ($5.0  million  after tax),  primarily a cash
charge, was recorded in the third quarter of fiscal 1996 to reflect future store
rentals and real estate  disposal  costs  related to the future  closing of nine
underperforming  stores. In addition,  the Company adopted Financial  Accounting
Standard No. 121,  "Accounting  for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets To Be Disposed  Of." This  Statement  requires the Company to
record  impairments of long-lived  assets and associated  goodwill when there is
evidence  that  events or  changes in  circumstances  have made  recovery  of an
asset's  carrying  value  unlikely.  Primarily  as a result of the  increasingly
competitive  environment for building materials retailing,  the Company recorded
an asset  impairment  charge of $59.7 million  ($44.6  million after tax).  This
charge included the carrying value  write-down of $25.7 million for certain real
estate which is considered impaired,



<PAGE> 9

MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued


the  write-off of $22.4  million of  goodwill,  which is  attributable  to those
assets  and which was  established  in 1988 as part of the  Company's  leveraged
buyout, and $11.6 million of future store lease obligations.

The provision for depreciation and amortization decreased from the third quarter
and first three  quarters of 1995 due  primarily  to  goodwill  written-off  and
assets removed from service in connection with the 1995 restructuring plan.

Interest  expense  for the  third  quarter  and  first  three  quarters  of 1996
decreased  compared to the same periods of 1995 primarily due to lower borrowing
levels in 1996. The Company also recorded  interest income of $4.9 million ($2.9
million after tax) in the third quarter of 1996 related to a tax benefit arising
out of recent legislation and a settlement with the Internal Revenue Service.

The income tax benefit for the first  three  quarters of 1996 was $38.2  million
compared to income tax expense of $11.8 million for the first three  quarters of
1995.  On August 20, 1996,  the Small  Business Job  Protection  Act of 1996 was
signed into law.  Certain  provisions  of this Act clarify the Tax Reform Act of
1986 and make retroactively tax deductible certain costs and expenses previously
recorded by the  Company  without any related  tax  benefit.  In  addition,  the
Company has recently settled with the Internal Revenue Service ("IRS") regarding
several tax issues. As a result, the Company has recorded a tax benefit of $23.7
million  and  related  interest  income,  discussed  earlier.  This tax  benefit
includes  recoverable income taxes of $10.0 million and non-cash tax benefits of
$13.7 million.  The effective tax rates for both periods were different from the
35% statutory rate primarily due to the effect of goodwill  amortization and the
third quarter write-off of goodwill as part of the asset impairment charge, both
of which are non-deductible for income tax purposes, and the tax benefit related
to recent  legislation  and the IRS  settlement.  Such tax  expense  or  benefit
reflects management's  estimates of the annual effective tax rates at the end of
each quarter.


Net Income (Loss)

Net loss for the quarter ended August 24, 1996 was $22.9 million compared to net
income of $8.1  million for the same  period of 1995.  The net loss for the 1996
quarter reflects the $5.8 million inventory write-down, the $8.2 million special
charge,  the $59.7 million asset  impairment  charge,  the $23.7 million federal
income tax  benefit,  and  related  $4.9  million  interest  income,  previously
discussed.  Without these non-routine items, net income for the third quarter of
1996 would  have been $3.6  million.  Net  income for the third  quarter of 1995
reflects a loss of $1.0  million  attributable  to the  Company's  former  joint
venture in Mexico discussed further below.

For the first three quarters of 1996, net loss was $24.6 million compared to net
income of $8.9  million for the same  period of 1995.  The net loss for the 1996
period  reflects  the  inventory  write-down,  the  special  charge,  the  asset
impairment  charge,  the federal  income tax benefit,  and the related  interest
income,  discussed above.  Excluding the non-routine items recorded in the third
quarter,  net income for the first  three  quarters of 1996 would have been $1.9
million. Net income for the first three quarters of 1995 reflects a loss of $3.5
million attributable to the Company's former joint venture discussed below.

Comparative Operating Data

(In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                               Thirteen Weeks Ended                              Thirty-Nine Weeks Ended
                                ------------------------------------------------   -------------------------------------------------
                                        August 24, 1996                                     August 24, 1996
                                --------------------------------                   -------------------------------
                                                     Historical                                         Historical
                                     Pro Forma       (Including                        Pro Forma        (Including
                                    (Excluding       non-routine  August 26, 1995     (Excluding       non-routine   August 26, 1995
                                non-routine items)     items)        Historical    non-routine items)    items)        Historical
                                ------------------   -----------  ---------------  ------------------- -----------   ---------------

<S>                                 <C>            <C>            <C>                <C>              <C>              <C>
Net sales and other income          $ 725,274      $   725,274    $  738,594         $1,937,411       $1,937,411       $2,009,352
Income from operations before
  depreciation and amortization        37,762           31,915        48,920           91,149            85,302           115,542
Income (loss) before income taxes       9,317          (59,511)       18,106            5,976           (62,852)           24,110
Federal and state income taxes          5,689          (36,633)        8,985            4,105           (38,217)           11,765
Net income (loss)                       3,628          (22,878)        8,146            1,871           (24,635)            8,895

Net income (loss) per common share  $    .05      $       (.61)   $      .17         $   (.06)        $    (.73)       $      .12
</TABLE>



<PAGE> 10

MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued


LIQUIDITY AND CAPITAL RESOURCES

The  Company's  principal  source of cash is from  operations.  Cash provided by
operating  activities  was $29.4  million for the first  three  quarters of 1996
compared to $80.5 million for the same period of 1995. However, cash flow before
debt service was $12.0 million for the first three  quarters of 1996 compared to
$17.8  million for the same period of 1995 as  investing  activities,  discussed
further  below,  were scaled back from prior year  levels.  The decrease in cash
from operating  activities was primarily caused by decreased operating income, a
decrease in trade accounts  payable and an increase in merchandise  inventories.
During the first three quarters of 1996, the Company used cash of  approximately
$10.1  million in  operating  activities  related to the  execution  of the 1995
restructuring plan announced in the fourth quarter of 1995.

Borrowings are available  under the Amended Credit  Agreement to supplement cash
generated by  operations.  At August 24, 1996,  $56.7  million was available for
borrowing  under the  Amended  Credit  Agreement.  At August 24,  1996,  working
capital  was $111.8  million  compared to $98.4  million  and $117.6  million at
November  25, 1995 and August 26,  1995,  respectively.  The  current  ratios at
August 24, 1996,  November 25, 1995, and August 26, 1995 were 1.33 to 1, 1.29 to
1, and 1.35 to 1, respectively.

The  Company's  primary  investing   activities  are  capital  expenditures  for
strategic initiatives,  renovation of existing stores, and additional equipment.
The Amended Credit Agreement  governs the amount of capital  expenditures  which
can be made and increases the funds available for capital expenditures  compared
to the previous bank credit  agreement  (to $64 million in 1997,  $81 million in
1998,  $100  million  in 1999  and $59  million  in  2000).  The  Company  spent
approximately $29.1 million and $53.7 million during the first three quarters of
1996 and 1995, respectively, for strategic initiatives including the acquisition
of a door and trim  manufacturer  during  January  1996,  renovation of existing
stores,  additional  equipment  and, in fiscal  1995,  new  stores.  The Company
intends  to  finance  the  remaining   fiscal  1996  capital   expenditures   of
approximately  $21  million,  consisting  primarily  of  strategic  initiatives,
renovation of existing  stores and additional  equipment,  with funds  generated
from operations.  For fiscal 1996, the Company has shifted its emphasis from new
store openings to initiatives that further address the needs of the professional
and do-it-yourself customers. Several stores have been reoriented to concentrate
on the professional  customer and merchandise  assortment is being added to many
stores to address  do-it-yourself  customer  demand  for more  choices of price,
quality  and  style.  During  the first  quarter  of 1996,  the  Company  sold a
distribution  center in connection with the 1995 restructuring  plan,  providing
approximately $11.9 million of cash proceeds.

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

The Company's most significant financing activity is and will continue to be the
retirement  of  indebtedness.  In connection  with the sale of the  distribution
center,  discussed  above, and in anticipation of selling real estate related to
recently  closed  stores,  the Company  repaid  approximately  $16.5  million of
related  indebtedness  during the first quarter of 1996.  Although the Company's
consolidated  indebtedness  is and will continue to be  substantial,  management
believes that, based upon its analysis of the Company's financial condition, the
cash flow generated from  operations  during the past 12 months and the expected
results of operations  in the future,  cash flow from  operations  and borrowing
availability  under the  Amended  Credit  Agreement  should  provide  sufficient
liquidity  to meet  all  cash  requirements  for  the  next  12  months  without
additional borrowings.

Forward-looking  statements  included  in  the  subsection  entitled  "Cost  and
Expenses" and in this  subsection of this Quarterly  Report are made pursuant to
the safe harbor  provisions of the Private  Securities  Litigation Reform Act of
1995.  There are certain  important  factors that could cause  results to differ
materially  from  those  anticipated  by  some  of the  statements  made  above.
Investors are cautioned that all  forward-looking  statements  involve risks and
uncertainty. In addition to the factors discussed above, among the other factors
that could cause actual results to differ materially are the following: consumer
spending and debt levels;  interest rates; housing activity,  including existing
home turnover and new home  construction;  lumber  prices;  product mix; sale of
certain real estate; growth of certain market segments;  competitive pressure on
sales and pricing; and an excess of retail space devoted to the sale of building
materials.   Additional  information  concerning  those  and  other  factors  is
contained in the Company's Securities and Exchange Commission filings, including
but not limited to the Form 10-K, copies of which are available from the Company
without charge.


<PAGE> 11

REVIEW BY INDEPENDENT AUDITORS

The condensed  consolidated  financial statements of Payless Cashways,  Inc. for
the thirteen week and thirty-nine  week periods ended August 24, 1996 and August
26, 1995, have been reviewed by KPMG Peat Marwick LLP, independent auditors.
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 25,  1995.) 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. An Answer to the Complaint has been filed and
discovery is proceeding,  including discovery concerning  plaintiff's motion for
class certification. No hearing date has been scheduled.

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


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

         None.


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

         a.     Exhibits.

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

                4.1      Amended and Restated Credit  Agreement dated October 3,
                         1996, among Payless,  the Banks listed on the signature
                         pages  thereof and Canadian  Imperial Bank of Commerce,
                         New York Agency, as Administrative Agent and Collateral
                         Agent.

                4.2      Amended and Restated Borrower Security Agreement, dated
                         October 3, 1996,  made by  Payless  for the  benefit of
                         Canadian Imperial Bank of Commerce, New York Agency, as
                         Administrative  Agent  and  Collateral  Agent,  and the
                         banks and  other  financial  institutions  party to the
                         Amended and Restated Credit Agreement.

                4.3      Form of Deed of Trust,  dated October 3, 1996, given to
                         Canadian Imperial Bank of Commerce, New York Agency, as
                         Administrative  Agent  and  Collateral  Agent,  and the
                         banks and  other  financial  institutions  party to the
                         Amended and Restated Credit Agreement.

                4.4      Form of  Mortgage,  dated  October  3,  1996,  given to
                         Canadian Imperial Bank of Commerce, New York Agency, as
                         Administrative  Agent  and  Collateral  Agent,  and the
                         banks and  other  financial  institutions  party to the
                         Amended and Restated Credit Agreement.

                10.1*    Employment  Agreement  dated  as  of  August  2,  1996,
                         between Payless and William H. Parker.

                11.1     Computation of per share earnings.

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

                27.1     Financial data schedule.

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

         b.     Reports on Form 8-K.

                No reports on Form 8-K were filed by Payless  during the quarter
                ended August 24, 1996.


<PAGE> 12


                                   SIGNATURE


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


                                  PAYLESS CASHWAYS, INC.
                                  (Registrant)


Date:  October 7, 1996        By: s/Stephen A. Lightstone
                                  ---------------------------------------------

                                  Stephen A. Lightstone, Senior Vice President,
                                  Finance and Chief Financial Officer
                                  (Principal Financial Officer and Principal
                                  Accounting Officer)