<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 Secu-
                  rities Exchange Act of 1934

                  For the quarterly period ended May 26, 2001

                                       Or

  /     /         Transition report pursuant to Section 13 or 15(d) of the Secu-
                  rities 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.)


         800 NW Chipman Road, Suite 5900
         P.O. Box 648001
         Lee's Summit, Missouri                                       64064-8001
         (Address of Principal Executive Offices)                     (Zip Code)

                  (816) 347-6000
(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 th  regis-
trant  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 re-
ports  required to be filed by Section 12, 13, or 15(d)  of the  Securities  Ex-
change  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 20,000,000 shares of Common Stock, $.01 par value,  outstanding as of
July 7, 2001.


<PAGE>2


PAYLESS CASHWAYS, INC.

                         PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements.

STATEMENTS OF OPERATIONS (Unaudited) (1) (2)

<TABLE>
<CAPTION>
                                                           Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                                    --------------------------------      --------------------------------
                                                           May 26,          May 27,             May 26,          May 27,
(In thousands, except per share amounts)                    2001           2000 (a)              2001           2000 (a)
                                                    --------------------------------      --------------------------------
     <S>                                             <C>                <C>                <C>                <C>
     Net sales                                       $    238,374       $    421,730       $     471,259      $    768,843
     Cost of merchandise sold (5)                         194,785            312,951             361,737           560,978
                                                    --------------------------------       -------------------------------
     Gross Profit                                          43,589            108,779             109,522           207,865

     Selling, general and administrative                   64,940             88,994             127,279           182,623
     Other Income                                            (453)              (871)               (795)           (1,335)
     Special charges-net (5)                               28,010                384              28,010               578
     Provision for depreciation and amortization            6,747              6,137              13,704            15,073
                                                    --------------------------------       -------------------------------

 OPERATING INCOME (LOSS)                                  (55,655)            14,135             (58,676)           10,926

     Interest Expense                                       8,259             10,636              18,107            20,722
                                                    --------------------------------      --------------------------------

 INCOME (LOSS) BEFORE INCOME TAXES                        (63,914)             3,499             (76,783)           (9,796)

 Federal and state income taxes                            (5,579)             2,956             (18,727)           (6,121)
                                                    --------------------------------      --------------------------------

                               NET INCOME (LOSS)    $     (58,335)             $ 543      $      (58,056)      $    (3,675)
                                                    ================================      ================================


 Weighted average common shares outstanding                20,000             20,000              20,000            20,000
                                                    --------------------------------      --------------------------------
 Net income (loss) per common share-basic (4)       $       (2.92)              0.03      $        (2.90)            (0.18)
                                                    ================================      ================================

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

 Net income (loss) per common share-diluted (4)     $       (2.92)              0.03      $        (2.90)            (0.18)
                                                    ================================      ================================




<FN>
 (a)      As adjusted-see note (3)
</FN>
See notes to condensed financial statements
</TABLE>



<PAGE>3


CONDENSED BALANCE SHEETS (Unaudited) (1) (2)

<TABLE>
<CAPTION>

                                                                    May 26,              November 25,           May 27,
(In thousands)                                                       2001                  2000 (a)            2000 (a)
                                                                --------------------------------------------------------
<S>                                                             <C>                    <C>                   <C>
ASSETS

     CURRENT ASSETS

       Cash and cash equivalents                                $        817           $       1,485         $     1,135
       Merchandise inventories (3)                                   218,809                 314,061             377,748
       Prepaid expenses and other current assets                      25,213                  19,246              15,849
       Income taxes receivable                                            --                      --                 675
                                                                --------------------------------------------------------
                                        TOTAL CURRENT ASSETS         244,839                 334,792             395,407

     OTHER ASSETS

       Real estate held for sale                                      53,761                   3,785               5,898
       Deferred financing costs                                        3,670                   3,051               3,443
       Other                                                           2,672                   3,090               1,433

     LAND, BUILDINGS, EQUIPMENT AND SOFTWARE                         338,095                 430,971             414,267
       Allowance for depreciation and amortization                   (92,314)                (95,459)            (81,467)
                                                                --------------------------------------------------------
         NET  LAND, BUILDINGS AND EQUIPMENT                          245,781                 335,512             332,800
                                                                --------------------------------------------------------

                                                                $    550,723           $     680,230         $   738,981
                                                                ========================================================


LIABILITIES AND STOCKHOLDERS' EQUITY

     CURRENT LIABILITIES
       Current portion of long-term debt (7)                    $    292,566          $     10,181          $        174
       Trade accounts payable                                         71,091                38,633                51,881
       Other current liabilities                                      74,082                76,537                60,068
       Income taxes payable                                              678                   927                 1,646
       Deferred income taxes                                             ---                 5,510                 7,923
                                                                --------------------------------------------------------
                                   TOTAL CURRENT LIABILITIES         438,417               131,788               121,692

     LONG-TERM DEBT, less portion
       classified as current liability (7)                               ---               363,432               407,881

     NON-CURRENT LIABILITIES
       Deferred income taxes                                             ---                13,192                20,483
       Other                                                          35,948                37,404                37,319

     STOCKHOLDERS' EQUITY
       Common Stock, $.01 par value, 50,000,000 shares

         authorized, 20,000,000 shares issued                            200                   200                   200
       Additional paid-in capital                                    183,600               183,600               183,600
       Accumulated deficit                                          (107,442)              (49,386)              (32,194)
                                                                --------------------------------------------------------
                                  TOTAL STOCKHOLDERS' EQUITY          76,358               134,414               151,606
                                                                --------------------------------------------------------

                                                                $    550,723          $    680,230          $    738,981
                                                                ========================================================

<FN>
(a)      As adjusted-see note (3)
</FN>
      See notes to condensed financial statements
</TABLE>


<PAGE>4


CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1

<TABLE>
<CAPTION>
                                                                                         Twenty-six Weeks Ended
                                                                             ------------------------------------------
                                                                                   May 26,                      May 27,
(In thousands)                                                                      2001                       2000 (a)
                                                                             ------------------------------------------
<S>                                                                          <C>                               <C>
Cash Flows from Operating Activities

     Net loss                                                                $         (58,056)                $ (3,675)
     Adjustments to reconcile net loss to net cash
       provided by operating activities:
         Depreciation and amortization                                                  13,704                   15,073
         Deferred income taxes                                                         (18,024)                  (6,121)
         Non-cash interest                                                               1,060                      660
         Other                                                                          (1,778)                    (678)
     Changes in assets and liabilities                                                 123,699                  (33,173)
                                                                             ------------------------------------------

     NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                60,605                  (27,914)

Cash Flows from Investing Activities

     Additions to land, buildings and equipment                                         (4,747)                  (8,049)
     Proceeds from sale of land, buildings and equipment                                26,593                    5,630
     Decrease in other assets                                                              418                      116
                                                                             ------------------------------------------

     NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                22,264                   (2,303)

Cash Flows from Financing Activities

     Principal payments on long-term debt                                              (23,538)                  (8,121)
     Net proceeds from/(payments on) revolving credit facility                         (57,509)                  38,757
     Other                                                                              (2,490)                    (395)
                                                                             ------------------------------------------

     NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                               (83,537)                  30,241
                                                                             ------------------------------------------

     Net increase (decrease) in cash and cash equivalents                                 (668)                      24
     Cash and cash equivalents, beginning of period                                      1,485                    1,111
                                                                             ------------------------------------------
     Cash and cash equivalents, end of period                                $             817            $       1,135
                                                                             ==========================================
<FN>
(a)      As adjusted-see note (3)
</FN>
      See notes to condensed financial statements
</TABLE>



<PAGE>5


NOTES TO CONDENSED FINANCIAL STATEMENTS

Twenty-six weeks ended May 26, 2001, and May 27, 2000

(1)    On  June  4,  2001  (the  "Petition  Date"),   the  Company  commenced  a
       reorganization  case (the  "Case")  by filing a  voluntary  petition  for
       relief  under  Chapter 11, Title 11 of the United  States Code  ("Chapter
       11") in the U.S. Bankruptcy Court for the Western District of Missouri in
       Kansas City (the "Court").

       Because  of   contractual   constraints  of  the  Company's  1999  Credit
       Agreement,  the Company  did not have  sufficient  liquidity  to fund its
       current  operations  or procure and purchase  necessary  inventory.  As a
       result of the  spiraling  effect  of sales  declines  caused  by  product
       procurement  difficulties,  a general industry  economic  slowdown,  poor
       weather conditions, reductions in mass advertising and cash constriction,
       the operating  performance  of the Company  during the second  quarter of
       fiscal 2001 was well below the Company's  expectations.  In the course of
       the  Company's  subsequent   negotiations  with  its  senior  lenders  to
       restructure its debt and after  considering all other  alternatives  with
       its  financial  adviser,  Peter  J.  Solomon  and  Company,  the  Company
       concluded  that a Chapter 11 proceeding  provided the best approach for a
       comprehensive financial restructuring of the Company.

       As of July 16, 2001, the Company has not filed a Disclosure Statement and
       a Plan of Reorganization with the Court. Once the Disclosure Statement is
       filed and approved,  the Plan of Reorganization  will be presented to the
       Company's  impaired  creditors and equity security holders for acceptance
       or rejection.

       Borrowings under the 1999 Credit Agreement are no longer available to the
       Company.  An agreement in principle for a revolving  credit facility (the
       "DIP   Agreement"),  subject  to   Court   approval,  has    been reached
       between  the  Company  and a group of  institutional  lenders  (the  "DIP
       Lenders") led by Congress Financial  Corporation  ("Congress"),  as agent
       bank and Hilco Capital LP in its capacity as the 100%  participant in the
       Supplemental  Loan. No assurance can presently be given that a definitive
       agreement will be reached. The  preliminary DIP Agreement calls for a re-
       volving credit and letter of credit facility in an  aggregate   principal
       amount not to exceed  $160  million for 60 days, $140 million for  61-120
       days and $130  million  for the duration of the agreement (one-year  from
       the loan closing  date).  Interest on the DIP  Agreement is to be charged
       at an annualized rate of 1.75% in excess of  the prime  rate or,  at  the
       Company's   option, the Adjusted  Eurodollar Rate plus 3.75%. Interest o
       the Supplemental  Loan ($15  million  aggregate principal  amount), is to
       be fixed at 16% per  annum.  The  DIP agreement will  likely  contain nu-
       merous restrictive  covenants  and be  subject to acceleration in certain
       events.  In addition to  existing  collateral, it is  expected   that the
       agreement  will include a pledge of a junior lien for real estate   after
       satisfying  the terms of the existing mortgage loan  securitization.  The
       Court  has  granted  the  Company  the temporary use of cash  collateral,
       allowing  the  Company  use  of cash generated by operations to replenish
       necessary  merchandise  inventory  which was diminished by  the  terms of
       the asset based loan facility.

       In order for the  Company to  reorganize  and emerge  from the Case,  the
       Court must  confirm a plan of  reorganization.  A  disclosure  statement,
       approved by the Court will be sent to all  classes of impaired  creditors
       and equity  security  holders  for  acceptance  or  rejection.  Following
       acceptance or rejection of any plan by impaired  classes of creditors and
       equity security holders,  the Court would consider whether to confirm the
       plan.  Among  other  things  to  confirm a plan,  the Court is  generally
       required to find that (a) each  impaired  class of  creditors  and equity
       security holders will,  pursuant to the plan, receive at least as much as
       the class would have  received in  liquidation  of the Company,  (b) each
       impaired class of creditors and equity security  holders has accepted the
       plan by the requisite vote and (c) confirmation of the plan is not likely
       to  be  followed  by  the  liquidation  or  need  for  further  financial
       restructuring  of the  Company.  If any  impaired  class of  creditors or
       equity  security  holders  does not accept a plan and  assuming  that all
       other  requirements  of the Bankruptcy  Code are met, the plan proponents
       may invoke the so-called  "cram-down"  provisions of the Bankruptcy Code,
       whereby the Court may confirm a plan not withstanding  the non-acceptance
       of the plan by an impaired  class of  creditors  or security  holders if,
       among  other  things,  the  plan is  fair  and  equitable  and  does  not
       discriminate  unfairly with respect to each  impaired  class of claims or
       interests that has not accepted the plan.

       The accompanying  condensed financial  statements have been prepared on a
       going concern basis, which assumes continuity of operations,  realization
       of assets  and  liquidation  of  liabilities  in the  ordinary  course of
       business. However, as a result of the Chapter 11 filing and circumstances
       relating  thereto,  substantial  uncertainty  exists with  respect to the
       Company's ability to continue as a going concern.


<PAGE>6


       If  the  Company  is  unable  to  obtain   confirmation   of  a  plan  of
       reorganization,  its  creditors  or equity  security  holders  may seek a
       liquidation  of the  Company  by  conversion  to a Chapter  7  bankruptcy
       proceeding  or  otherwise.  In that event,  it is likely that  additional
       liabilities  and  claims  would  be  asserted  which  are  not  presently
       reflected in the Company's  financial  statements.  Furthermore,  certain
       assets and liabilities,  such as merchandise  inventories and liabilities
       related to defined benefit pension plans, are presented using assumptions
       appropriate for an ongoing business.  In the event of liquidation,  other
       assumptions  would be utilized and the amounts reflected in the financial
       statements  would be  subject to adverse  adjustments  in amounts  which,
       while not presently determinable, would be material.

       Financial  accounting  during a Chapter 11  proceeding  is  prescribed in
       "Statement of Position 90-7 of the American Institute of Certified Public
       Accountants,"  titled "Financial  Reporting by Entities in Reorganization
       Under the Bankruptcy  Code" which the Company adopted June 4, 2001. Among
       other things, Statement of Position 90-7 provides that the emergence from
       the Chapter 11 proceeding would result in the creation of a new reporting
       entity without any accumulated  deficit and with the Company's assets and
       liabilities  restated to their fair values, under so-called "fresh start"
       reporting.  The impacts of fresh start reporting will be dependent on the
       terms of any plan of reorganization confirmed by the Bankruptcy Court and
       the fair  values of assets and  liabilities  at such time.  However,  the
       Company  believes  that the  present  aggregate  carrying  value of land,
       buildings  and equipment may exceed the fair value of such assets and, as
       a  result,  write-downs  in the  carrying  value  of such  assets  may be
       required as a part of fresh start reporting,  although the amounts of any
       such  write-downs  are not  presently  determinable.  See  Note (6) for a
       discussion of recently  announced  potential  store  closings and related
       charges.

(2)    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  25,
       2000, 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, 2000,
       condensed  balance  sheet has been  derived  from the  audited  financial
       statements  as of that date except for those  amounts which were impacted
       by the  change  in  accounting  method  discussed  in note  (3).  Certain
       reclassifications   have  been  made  to  the  May  27,  2000,  financial
       statements to conform to the current presentation.

(3)    In the first  quarter of fiscal  2001 the  Company  changed its method of
       accounting for certain hardware  inventories from the last-in,  first-out
       (LIFO) method to the first-in,  first-out  (FIFO) method.  As a result of
       the trend towards declining unit costs of this  merchandise,  the Company
       believes  that the new method is  preferable  because  the FIFO method of
       valuing  inventory  more closely  matches  current  costs and revenues in
       periods of declining  prices.  The  Company's  method of  accounting  for
       lumber  and  related  merchandise  is  the  FIFO  method,  which  remains
       unchanged.  Prior period financial statements have been restated to apply
       the new method  retroactively.  The  impacts of the change on  previously
       reported  results for the thirteen weeks and  twenty-six  weeks ended May
       27, 2000, respectively, are as follows (in thousands):

<TABLE>
                                         <S>                                                                 <C>
                                        Net income as previously reported (thirteen weeks)                  $  1,234
                        Adjustment for effect of change in accounting method for inventory                      (691)
                                                                                                               -----

                                                   Net income as adjusted (thirteen weeks)                  $    543
                                                                                                               =====

    Net income per common share-basic and diluted, as previously reported (thirteen weeks)                  $    .06
                        Adjustment for effect of change in accounting method for inventory                      (.03)
                                                                                                               -----
                                Net income per common share-basic and diluted, as adjusted                  $    .03
                                                                                                               =====

                                        Net loss as previously reported (twenty-six weeks)                  $ (4,008)
                        Adjustment for effect of change in accounting method for inventory                       333
                                                                                                               -----

                                                   Net loss as adjusted (twenty-six weeks)                  $ (3,675)
                                                                                                               =====
</TABLE>

<PAGE>7

<TABLE>
     <S>                                                                                                   <C>

    Net loss per common share-basic and diluted, as previously reported (twenty-six weeks)                  $   (.20)
                        Adjustment for effect of change in accounting method for inventory                       .02
                                                                                                               -----
                                  Net loss per common share-basic and diluted, as adjusted                  $   (.18)
                                                                                                               =====



  The impacts of the change on the previously reported  accumulated deficit are as follows
  (in thousands):

                                Accumulated deficit at May 27, 2000 as previously reported                 $ (34,511)
                        Adjustment for effect of change in accounting method for inventory                     2,317
                                                                                                              ------

                                           Accumulated deficit at May 27, 2000 as adjusted                 $ (32,194)
                                                                                                              ======



                           Accumulated deficit at November 25, 2000 as previously reported                 $ (51,054)
                        Adjustment for effect of change in accounting method for inventory                     1,668
                                                                                                              ------

                                      Accumulated deficit at November 25, 2000 as adjusted                 $ (49,386)
                                                                                                              ======
</TABLE>


(4)    Basic   earnings  per  common  share  has  been  computed  based  on  the
       weighted-average  number of common shares  outstanding during the period.
       Dilutive   earnings  per  common  share have been 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  thirteen  and  twenty-six
       weeks  ended  May  26,  2001,   the  impact  of  such  stock  options  is
       antidilutive.

(5)    A net special  charge of $28.0 million was recorded in the second quarter
       of fiscal 2001.  Approximately $29.3 million of the charge was related to
       the  current  closing  of  24  retail  stores  and 5  Builders   Resource
       locations  while a $1.3  million  credit was  recorded to adjust the 2000
       special charge (see Note 6), for subsequent  activity.  In addition,  the
       Company  recorded an inventory  write-down of $12.0 million,  included in
       cost  of  merchandise  sold,  in  connection  with  the  store  closings.
       Approximately $2.8 million of the write-down was an adjustment associated
       with the 23 stores  whose  closing  activity  ended in March of 2001.

<TABLE>
                                                                         Amount              Amount               Reserve
                                                                        Charged             Utilized                 at
       (In millions)                                                    2nd Qtr.        Through 5/26/01           5/26/01
                                                                        -------------------------------------------------
       <S>                                                              <C>                 <C>                   <C>

       Severance                                                        $   4.1             $   0.1               $   4.0
       Other costs                                                         25.2                 7.8                  17.4
                                                                        ------------------------------------------------------
                                                                       $   29.3             $   7.9               $  21.4
</TABLE>


<PAGE>8


(6)    A special  charge of $20.4 million was recorded in the fourth  quarter of
       fiscal 2000 in connection with the closing of 23 stores. In addition, the
       Company  recorded an inventory  write-down of $11.8 million , included in
       cost of  merchandise  sold in the  fourth  quarter  of  fiscal  2000,  in
       connection with the store closings. The 2000 special charge included:

<TABLE>

                                                                         Amount          Amount           Reversal of        Reserve
                                                                        Charged         Utilized        Reserve Through         at
       (In millions)                                                      2000       Through 5/26/01    5/26/01 (Note 5)     5/26/01
                                                                        ------------------------------------------------------------
           <S>                                                          <C>              <C>               <C>                 <C>
           Severance                                                    $  2.5           $   2.5           $  ---              $ ---
           Other costs                                                    17.9              16.5             (1.3)               0.1
                                                                        ------------------------------------------------------------
                                                                        $ 20.4           $  19.0           $ (1.3)             $ 0.1

</TABLE>


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

<TABLE>
                                                                                May 26,             November 25,            May 27,
       (In thousands)                                                            2001                   2000                 2000
                                                                              ------------------------------------------------------
       <S>                                                                 <C>                    <C>                    <C>
       1999 Credit Agreement, variable interest rate                       $    132,346           $    189,856           $   222,143
       1997 Credit Agreement, variable interest rate                            106,048                106,048               106,169
       Mortgage loan, variable interest rate                                     53,474                 76,906                78,875
       Other senior debt                                                            698                    803                   868
                                                                           ---------------------------------------------------------
                                                                                292,566                373,613               408,055
       Less portion classified as current liability                            (292,566)               (10,181)                (174)
                                                                           ---------------------------------------------------------
                                                                           $        ---           $    363,432           $   407,881
                                                                           =========================================================
</TABLE>

         The terms of substantially all of the Company's debt agreements contain
         cross default  provisions.  The  commencement  of the Case (Chapter 11)
         constituted  a default  under the 1999  Credit  Agreement  and the 1997
         Credit Agreement.  Accordingly,  the outstanding balances of all of the
         Company's  long-term  debt  outstanding  at May  26,  2001,  have  been
         classified as current liabilities.

(8)  Subsequent Events - On July 13, 2001,  the Company  reached an agreement in
     principle for DIP financing  with its senior  lenders.  Information on this
     preliminary  agreement is included in the "Liquidity and Capital Resources"
     section of Management's  Discussion and Analysis of Financial Condition and
     Results of Operations.  On July 10, 2001,  the Company also  petitioned the
     Court for  approval to close up to an additional 43 facilities  (9 of which
     have already been included in the 2nd quarter reserve-Note 4) and to elimi-
     nate  approximately  145  positions  at  the  Company's  headquarters   and
     regional   administrative centers.  These actions are expected to result in
     a pretax charge of $35 to $40 million in the third quarter of  fiscal  2001
     for store closing and staff elimination costs.


<PAGE>9


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





PETITION FOR RELIEF UNDER CHAPTER 11

Because of declining  sales and  contractual  constraints  of the Company's 1999
Credit  Agreement  the Company  did not have  sufficient  liquidity  to fund its
current  operations  or procure and purchase  necessary  inventory as of May 26,
2001.  In the second  quarter the Company's  asset based  lenders  significantly
constricted  credit,  thereby  reducing  cash  availability  under the Company's
current agreement (the 1999 Credit Agreement). As a result, late vendor payments
resulted in product procurement issues and "out-of-stocks"  which contributed to
further  sales  declines  in  April  and May of the  current  fiscal  year.  The
spiraling effect of sales declines and cash constriction  seriously impaired the
Company's  operating  performance  during the second quarter of fiscal 2001. The
situation  was  exacerbated  by the inability to procure core  products.  In the
course of the  Company's  subsequent  negotiations  with its  senior  lenders to
restructure  its debt and  after  considering  all other  alternatives  with its
financial  adviser,  Peter J. Solomon and Company,  the Company concluded that a
Chapter 11 proceeding  provided the best approach for a comprehensive  financial
restructuring  of the Company.  This action is intended to improve the Company's
competitive  position by establishing a more  appropriate  capital  structure to
operate the business.

On June 4, 2001,  the Company  filed a voluntary  petition to  reorganize  under
Chapter 11. The Company  will  operate its  business as a  debtor-in-possession,
subject to the  jurisdiction of the Court,  while pursuing the finalization of a
reorganization plan designed to restructure the Company's  capitalization.  As a
debtor-in-possession  in Chapter 11, the Company may not engage in  transactions
outside of the ordinary  course of business  without the approval,  after notice
and hearing, of the Court.

The  Chapter  11 filing  results in an  automatic  stay of the  commencement  or
prosecution  of claims  against the Company that arose before the Petition Date.
Until a reorganization plan is confirmed by the Court,  payments of pre-petition
liabilities  will be  limited  to  those  payments  approved  by the  Court.  In
addition,  a plan of reorganization will materially change the amounts currently
recorded in its financial  statements.  The financial  statements do not include
any adjustments to reflect the possible future effects of the recoverability and
classification  of assets,  the amounts and  classification of liabilities which
may be allowed in a reorganization  plan, or the ultimate  capitalization of the
Company.

Once the Company files a disclosure  statement and plan of  reorganization  with
the Court, the Court must determine  whether the disclosure  statement  contains
adequate information to permit a creditor to make an informed decision about the
plan. Once the disclosure  statement is approved,  the plan will be presented to
the Company's impaired  creditors and equity security holders.  Unless otherwise
ordered by the Court, confirmation of the plan requires approval of all impaired
classes of creditors  and  affirmation  by the Court.  There can be no assurance
that the plan, when filed, will be so approved and affirmed.

If the Company is unable to obtain  confirmation  of a plan,  its  creditors  or
equity security holders may seek other  alternatives for the Company,  including
bids for the Company or parts thereof through an auction process. In that event,
it is  possible  that  certain  assets  would  not be  realized  and  additional
liabilities  and claims would be asserted  which are not presently  reflected in
the financial statements and which are not presently determinable. The effect of
any such assertion or non-realization could be material.  The Company will incur
professional fees and other cash demands typically incurred in bankruptcy.

The rights of pre-petition  creditors and  shareholders and the ultimate payment
of their claims and interests may be  substantially  altered and, in some cases,
eliminated under the Bankruptcy Code. It is not possible at this time to predict
the  ultimate  outcome  of the  Chapter  11  proceeding  or its  effects  on the
Company's  business or on the claims or interests of creditors or  shareholders.
The claims of pre-petition unsecured creditors and the interests of shareholders
will likely be materially adversely affected.



<PAGE>10


RESULTS OF OPERATIONS

Sales

Net sales for the quarter  ended May 26, 2001,  decreased  35.9% on a same-store
sales basis and  decreased  43.5% from the same  period of 2000 in total.  (Same
stores  are those  open one full  year.)  Net  sales for the first  half of 2001
decreased 32.6% on a same-store  basis and 38.7% from the same period of 2000 in
total.  The same-store sales decrease for the quarter and the first half of 2001
were  primarily  due to poor weather  conditions,  a general  industry  economic
slowdown and reductions in mass  advertising  activity.  The sales in the second
quarter were also negatively  impacted by product  procurement  issues (see note
(1) to condensed financial  statements and the  Liquidity and Capital  Resources
section).  Same-store sales to  professional customers   decreased  29.9%  while
same-store   sales  to do-it-yourself  customers  declined 43.1% in  the  second
quarter. The sales mix by customer type was  approximately  61% professional and
39% do-it-yourself compared with 56% professional and 44% do-it-yourself for the
quarter last year. During the second  quarter of 2001,  the  Company  began  the
closing of 24 stores and 5 Builders  Resource   locations  in addition to the 23
stores closed  during the first quarter of 2001. Sales from these 47 stores were
$47.3 million and $140.1 million in the second quarter of 2001 and 2000, respec-
tively.

Costs and Expenses

Cost of  merchandise  sold,  as a percent of sales,  was 81.7% and 74.2% for the
second  quarter of 2001 and 2000,  respectively.  For the first half of 2001 and
2000, cost of merchandise sold was 76.8% and 73.0%,  respectively.  The increase
for the second  quarter and first half of 2001 was due primarily to the negative
impact  of the 47  store  closings  - 5.0%  for the  quarter  and  3.3%  for the
twenty-six weeks (sales at these locations were recorded at a 0.0% margin). Cost
of merchandise  sold in the second quarter of 2000 was increased by $1.1 million
(0.3%),  and  decreased  by $0.5  million  for the  first  half of 2000 from the
previously  reported  results to reflect the restatement of inventory value from
LIFO to FIFO. See note (3) to condensed financial statements.

Selling,  general and administrative  expenses were 27.2% and 21.1% of sales for
the second  quarter of 2001 and 2000,  respectively.  For the first half of 2001
and 2000,  selling,  general and  administrative  expenses were 27.0% and 23.8%,
respectively.  Selling,  general  and  administrative  expenses  for the  second
quarter  and first  half of 2001  decreased  $24.0  million  and $55.3  million,
respectively,  compared  to the same  period of the prior  year.  This  decrease
primarily  reflects the impact of store closings  ($17.9 million- second quarter
and $33.6 million- first half) and significant  expense  control  measures ($6.1
million - second quarter and $21.7  million- first half).  As a direct result of
the  Company's  inability to purchase  and procure  product in the first half of
fiscal 2001, vendor advertising allowances were $3.3 million lower than planned.
Additionally  as a result of the  subsequent  Chapter  11  filing,  the  Company
expects  that  certain  uncollected  vendor  advertising  allowances  previously
recorded in fiscal 2001  (aggregating  $6.5  million at May 26, 2001) may not be
fully  recoverable.  The Company is presently unable to estimate that portion of
the vendor  allowances  which may not be collected or applied to reduce  amounts
payable to trade creditors and such amount could be significant.

The provision for  depreciation  and amortization was 2.8% and 1.5% of sales for
the second  quarter of 2001 and 2000,  respectively.  For the first half of 2001
and  2000,  the  provision  for   depreciation  was  2.9%  and  2.0%  of  sales,
respectively.  The increase as a percent of sales  for the  second quarter   and
first half of 2001 resulted  from a reassessment of the  estimated  useful lives
of certain fixed asset classes during the second quarter of 2000.

Interest  expense for the second quarter of 2001 decreased $2.4 million compared
to the same period of 2000  primarily due to lower  borrowing  levels,  combined
with lower interest rates in 2001.

The income tax benefit for the second quarter of 2001 was $5.6 million  compared
to a tax expense of $3.0 million for the second  quarter of 2000.  The effective
tax rate for 2001 was  different  from the 35%  statutory  rate  primarily  as a
result of a deferred tax valuation allowance  established that limited the level
of the deferred tax benefit  recorded in the second quarter of fiscal 2001. 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

Net loss for the quarter ended May 26, 2001,  was $58.3 million  compared to net
income of $0.5 million for the same period of 2000.  For the first half of 2001,
net loss was $58.0 million compared to $3.7 million for the same period of 2000.


<PAGE>11


Basic and diluted loss per common share was $2.92 for the second quarter of 2001
compared to income per common  share of $.03 for the same  period of 2000.  Loss
per common  share was $2.90 for the first  half of fiscal  2001,  a decrease  of
$2.56 from a loss of $.18 per common share for the same period of fiscal 2000.

NEW ACCOUNTING PRONOUNCEMENTS

In June of 1998,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("FAS") No. 133,  "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement,  as
amended by FAS No. 138,  "Accounting  for  Certain  Derivative  Instruments  and
Certain Hedging Activities-an  Amendment of FASB Statement No. 133", establishes
accounting and reporting  standards for derivative  instruments  and all hedging
activities.  It requires  that an entity  recognize  all  derivatives  as either
assets or liabilities at their fair market values. Accounting for changes in the
fair value of a derivative  depends on its  designation and  effectiveness.  For
derivatives that qualify as effective hedges, the change in fair value will have
no impact on earnings until the hedged item affects  earnings.  For  derivatives
that are not designated as hedging  instruments,  or for the ineffective portion
of a hedging  instrument,  the change in fair value will affect  current  period
earnings. The FASB delayed the effective date of implementing the standard until
January 1, 2001, and therefore the Company was required to adopt SFAS 133 in the
first quarter of fiscal 2001.  The Company does not presently  engage in hedging
activities  or  own  any  derivative  instruments  that  require  the  described
treatment.

In September  2000, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 140,  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
which  replaces SFAS 125,  "Accounting  for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities". This standard revises the methods for
accounting  for  securitizations  and other  transfers of  financial  assets and
collateral as outlined in SFAS 125, and requires certain additional disclosures.
For  transfers  and  servicing  of  financial  assets  and   extinguishments  of
liabilities,  this standard became effective for transfers occurring after March
31, 2001. However, for disclosure regarding  securitizations and collateral,  as
well as recognition and  reclassification  of collateral,  this standard will be
effective  for fiscal  years ending  after  December  15,  2000.  The Company is
currently  evaluating the impact of the adoption of this  standard.  The Company
does not  presently  believe  that the  adoption  of this  standard  will have a
material effect on its financial position or results of operation.

LIQUIDITY AND CAPITAL RESOURCES

Cash  provided by operating  activities  was $60.6 million for the first half of
2001  compared to cash used of $27.9  million  for the same period of 2000.  The
increase  in cash  provided  by  operating  activities  was  primarily  due to a
decrease in merchandise  inventories  ($95.3  million)  versus  increases in the
prior year period.  Additionally,  increases in trade accounts  payable of $32.5
million,  some of which were the result of the credit  constraints  described in
the section  "Petition for Relief under Chapter 11"  contributed to the increase
in cash  provided  by  operations.  During the first half of 2001 and 2000,  the
Company used cash of approximately $9.6 million and $1.0 million,  respectively,
in  operating  activities  related  to  the  execution  of  the  2000  and  1999
restructuring plans.

Borrowings under the 1999 Credit Agreement are no longer available to the Compa-
ny.  An  agreement  in  principle  for  a revolving  credit  facility  (the "DIP
Agreement"), subject to Court  approval, has been reached  between  the  Company
and a group of institutional  lenders (the "DIP Lenders") led by Congress Finan-
cial Corporation ("Congress"), as agent bank and Hilco  Capital  LP, in  its ca-
pacity as the 100% participant in the Supplemental Loan. No assurance can  pres-
ently be given that a definitive  agreement will be  reached.   The  preliminary
DIP Agreement calls for a revolving credit and letter of credit  facility in  an
aggregate   principal  amount  not  to exceed $160   million  for 60 days,  $140
million for 61-120 days and $130  million for the  duration  of   the  agreement
(one year from the loan closing  date). Interest on the DIP Agreement is  to  be
charged at anualized rate of 1.75% in excess of prime or, at the  Company's  op-
tion,  the Adjusted  Eurodollar Rate plus  3.75%. Interest on the   Supplemental
Loan  ($15  million  aggregate  principal amount), is to  be  fixed at  16%  per
annum. The DIP agreement will likely contain numerous resrictive covenants   and



be subject to acceleration in certain events. In  addition to existing collater-
al, it is expected that the agreement will include a pledge of a junior lien for
real estate after satisfying the terms of the existing mortgage loan securitiza-
tion. The Court has granted the Company temporary use of cash collateral, allow-
ing the Company use of cash generated  by  operations  to  replenish   necessary
merchandise inventory which was diminished  by  the  terms of  the  asset  based
loan facility.


<PAGE>12


The terms of  substantially  all of the Company's debt agreements  contain cross
default  provisions.  The  commencement  of the Case (Chapter 11)  constituted a
default  under  the  1999  Credit  Agreement  and  the  1997  Credit  Agreement.
Accordingly,  the  outstanding  balances of all of the Company's  long-term debt
outstanding at May 26, 2001, have been classified as current liabilities. At May
26,  2001,  there was a working  capital  deficit of $193.6  million  due to the
reclassification of long-term debt as current. At November 25, 2000, and May 27,
2000, working capital was $203.0 million and $273.7 million,  respectively.  The
current ratio at May 26, 2001,  was 0.6 to 1 due to the same factor  causing the
working  capital  deficit.  The current ratios at November 25, 2000, and May 27,
2000, were 2.54 to 1, and 3.25 to 1, respectively.

During the first four months of 2001,  the  Company  experienced  a  significant
softening in its sales compared to the same period of fiscal 2000. This softness
was  attributable to three primary  factors:  significant  commodity  deflation,
unusually adverse weather  conditions in various parts of the country,  and some
degree of general industry economic slowdown.  Additionally, the Company's asset
based lenders continued to constrict credit,  thereby reducing cash availability
under the Company's current agreement (the 1999 Credit Agreement).  As a result,
late vendor payments resulted in product  procurement issues and "out-of-stocks"
which  contributed to further sales declines in the fifth and sixth month of the
fiscal  year.  The  spiraling  effect of sales  declines  and cash  constriction
necessitated  the filing of the Bankruptcy  Petition to make cash flow available
for vendor payments.  Sales for June continued the downward trend experienced in
the first half of fiscal 2001,  with  same-store  sales  decreasing  52.9%.  The
reversal of this trend will depend on the Company's  ability to procure  product
and improve in-stock positions in its stores and regain business lost due to the
issues described above.

The Company's  primary  investing  activities are capital  expenditures  for the
renovation  of existing  stores and  additional  equipment.  The  Company  spent
approximately  $4.7 million and $8.0 million during the first six months of 2001
and 2000,  respectively,  for renovation of existing stores, improved technology
and additional  equipment.  The Company intends to  significantly  limit capital
expenditures for the remainder of fiscal 2001. During the first half of 2001 and
2000, the Company sold 14 and 3 real estate properties, respectively, related to
stores  previously  closed for  approximately  $26.6 million and $5.6 million of
cash proceeds, respectively, which were used to reduce outstanding debt.

A net special charge of $28.0 million was  recorded  in  the  second  quarter of
fiscal 2001. Approximately $29.3  million  of  the  charge  was  related to  the
current closing of 24 retail stores and 5 Builders Resource locations.  On  July
10,  2001, the Company also petitioned the Court for approval to close up to  an
additional 43 facilities (9 of which have already been included in the 2nd quar-
ter reserve-Note 4)  and  to  eliminate   approximately  145  positions  at  the
Company's  headquarters and  regional  administrative  centers.  These   actions
are expected to result in a pretax charge of $35 to  $40  million in  the  third
quarter  of  fiscal 2001 for store closing and staff elimination costs.

The Company  believes that its ongoing  operating  cash flow and the  borrowings
expected to be available  under the DIP Agreement  (see above) should enable the
Company  to  meet  liquidity  requirements  during  the  restructuring  process.
However,  notwithstanding  all of the events and circumstances  described above,
there is no assurance of the  Company's  ability to maintain adequate  liquidity
and continue operations.

FORWARD-LOOKING STATEMENTS

Statements above in the subsections of this report entitled "Petition For Relief
Under Chapter 11",  "Costs and Expenses," "New  Accounting  Pronouncements"  and
"Liquidity and Capital  Resources"  such as "unlikely",  "intend",  "estimates",
"believe",  "expect",  "anticipate"  and  similar  expressions,  which  are  not
historical, are forward-looking statements that involve risks and uncertainties.
Such statements  include,  without limitation,  the Company's  expectation as to
future performance.

Such forward-looking  statements are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform Act of 1995.  There are  certain
important  factors  that could  cause  results to differ  materially  from those
anticipated by the  forward-looking  statements made above. These statements are
based on the current  plans and  expectations  of the Company and  investors are
cautioned that all  forward-looking  statements  involve risks and  uncertainty.
Among the factors that could cause actual  results to differ  materially are the
following: competitor activities; stability of the work force; consumer spending
and debt levels;  interest rates; new and existing housing  activity;  commodity
prices,  specifically lumber and wallboard;  product and customer mix; growth of


<PAGE>13


certain market segments;  weather; an excess of retail space devoted to the sale
of building materials;  the need for Bankruptcy Court approvals;  the success of
the Company's  reorganization  plan once filed and approved;  the ability of the
Company  to  obtain  Court  approval  for DIP  financing;  the  adequacy  of and
compliance  with a DIP  agreement;  stability  of  customer  demand;  lender and
supplier support and the many uncertainties  involved in operating a business in
a Chapter 11 bankruptcy environment. 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,
www.payless.cashways.com.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

No  material  changes in the  Company's  exposure to certain  market  risks have
occurred from the discussion  contained in Item 7A, Quantitative and Qualitative
Disclosures  About Market Risk,  filed as part of the Company's Annual Report to
Stockholders on Form 10-K for the fiscal year ended November 25, 2000.

                          PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings.

         On June 4, 2001,  the Company filed a voluntary  petition to reorganize
under  Chapter  11 of the United  States  Bankruptcy  Code in the United  States
Bankruptcy Court for the Western District of Missouri in Kansas City. During the
course of its Chapter 11 case, the Company will continue business  operations as
a debtor-in-possession. As a debtor-in-possession, the Company may not engage in
operations  outside the normal course of business without approval of the Court.
See Notes to Condensed  Financial  Statements  and  Management's  Discussion and
Analysis of Financial Condition and Results of Operations.

Item 3.  Defaults Upon Senior Securities.

         The  information  required  by  Part  II,  Item  3,  of  Form  10-Q  is
incorporated by reference from Note 7 of the Condensed Financial  Statements and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation - Liquidity and Capital Resources, set forth herein.

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

         The Annual Meeting of Stockholders was held April  18, 2001. Stockhold-
ers voted in favor of the  nominees  for director: Millard E. Barron (14,349,123
for, 182,415 withheld) and H.D Cleberg (14,348,075 for, 183,463 withheld) Direc-
tors who were previously elected and whose term of office as a director  contin-
ued  after the  meeting  were Peter G. Danis, Max D. Hopper, Donald  E.  Roller,
Peter M. Wood  and David G. Gundling.


Item 5.  Other Information.

         None

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

         a.     Exhibits.
                  4.0   Long term debt instruments of the Company in amounts not
                        exceeding ten percent (10%) of the total assets of   the
                        Company will be furnished upon request.


<PAGE>14



         b.     Reports on Form 8-K.


              The  Registrant  has  filed two  reports  on Form 8-K  during  the
              quarter  ended May 26, 2001.  The reports were dated March 14,2001
              and June 4, 2001 and both  contained  information  under Item 7.0,
              Financial  Statements  and  Exhibits and Item 9.0,  Regulation  FD
              Disclosure.


<PAGE>15


                                    SIGNATURE

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

                                                          PAYLESS CASHWAYS, INC.
                                                                    (Registrant)


Date:  July 16, 2001                            By:      /s/ Richard B. Witaszak


                                                Richard B. Witaszak, Senior Vice
                                                President-Finance  and Chief Fi-
                                                nancial  Officer  (Principal Fi-
                                                nancial  Officer  and  Principal
                                                Accounting Officer)