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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED JANUARY 29, 1999

                           COMMISSION FILE NO. 0-23389

                              ----------------------

                              PAPER WAREHOUSE, INC.
             (Exact name of registrant as specified in its charter)

                MINNESOTA                                     41-1612534
     (State of other jurisdiction of                       (I.R.S. Employer
     incorporation or organization)                      Identification No.)

                            7630 EXCELSIOR BOULEVARD
                          MINNEAPOLIS, MINNESOTA 55426
               (Address of principal executive offices) (Zip code)

       Registrant's telephone number, including area code: (612) 936-1000
        Securities registered pursuant to Section 12(b) of the Act: NONE
 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
                                 $.01 PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   X 
                             -----

As of April 21, 1999, 4,627,936 shares of the Registrant's Common Stock were 
outstanding. The aggregate market value of the Common Stock held by 
non-affiliates of the Registrant on such date, based upon the last sale price 
of the Common Stock as reported on the Nasdaq National Market on April 21, 
1999, was $4,558,761. For purposes of this computation, affiliates of the 
Registrant are deemed only to be the Registrant's executive officers and 
directors.

                      DOCUMENTS INCORPORATED BY REFERENCE:

PART III of this Annual Report on Form 10-K incorporates by reference 
information (to the extent specific sections are referenced to herein) from 
the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of 
Shareholders to be held on June 11, 1999 (the "1999 Proxy Statement").


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                                     PART I

         This Form 10-K contains trend information and other forward-looking 
statements. For this purpose, any statements contained in this Form 10-K that 
are not statements of historical fact may be deemed to be forward-looking 
statements. Without limitation the foregoing words such as "may," "will," 
"expect," "believe," "anticipate," "estimate," or "continue," or comparable 
terminology, are intended to identify forword-looking statements. These 
statements by their nature involve substantial risks and uncertainties and 
actual results could differ materially from historical results of operations 
and those discussed in the forward-looking statements. Factors that could 
cause actual results to differ materially include, but are not limited to, 
those identified below in the section entitled "Certain Risks".

ITEM 1.  BUSINESS.

         Paper Warehouse, Inc., a Minnesota corporation ("Paper Warehouse" or 
the "Company") is a growing chain of stores specializing in party supplies 
and paper goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE. 
The Company's seven principal markets are Tucson, AZ, Denver, CO, Kansas 
City, MO and KS, Minneapolis/St. Paul, MN, Oklahoma City/Tulsa, OK, Omaha, NE 
and Des Moines, IA, and Seattle, WA. Paper Warehouse stores offer an 
extensive assortment of special occasion, seasonal and everyday paper 
products, including party supplies, gift-wrap, greeting cards and catering 
supplies, at everyday low prices. The Company's 143 stores (97 Company-owned 
and 46 franchised stores) are conveniently located in major retail trade 
areas to provide customers with easy access to its stores.

         The Company offers a broad selection of party supplies and paper 
goods for a wide variety of celebratory occasions and everyday uses, 
including birthdays, weddings, baby showers, graduations and other family and 
religious celebrations, as well as seasonal events such as Valentine's Day, 
Easter, Fourth of July, Halloween, Thanksgiving, Christmas, Hanukkah and New 
Year's. Through its 8,500 square foot superstore prototype, the Company 
offers a comprehensive selection of over 19,000 SKUs, providing customers the 
convenience of one-stop shopping for all party supplies and paper goods. The 
Company's merchandise is organized by party themes, and the prominent signage 
and wide aisles allow customers easy access to coordinate the merchandise 
required for all party occasions. The Company believes that its extensive 
selection, combined with high in-stock positions, often stimulates customers 
to purchase additional products.

         The first Paper Warehouse store opened in Minneapolis, Minnesota in 
1983. The current management team purchased the Paper Warehouse business in 
1986 and incorporated the Company in Minnesota in 1987. The Company's 
principal executive offices are located at 7630 Excelsior Boulevard, 
Minneapolis, Minnesota, 55426 and its telephone number is (612) 936-1000.

PAPER WAREHOUSE STORES

         FORMAT. The Company developed its current store prototype based on 
management's industry and other extensive retail experience and customer 
research. Paper Warehouse operates stores that range in size from 3,000 
square feet to 8,500 square feet of retail space. Management introduced its 
current 8,500 square foot prototype store in 1994 and believes it is the 
optimal store format for its future growth. Of the 97 Company-owned stores, 
approximately 87% are 6,000 square feet or larger.

         Paper Warehouse stores are designed to create a customer-friendly
environment. The Company uses vibrant colors, theme-oriented merchandise
displays and unique products to create a fun and festive shopping experience.
The focal point of the Company's stores is the seasonal display located at the
front of each store, which creates a "store-within-a-store" appearance. These
displays maximize the season's 

                                      -2-
<PAGE>

selling impact and are updated continuously to promote a fresh image within 
the store. To assist customers in coordinating party supplies for any 
occasion, the Company locates related departments, such as gift-wrap and 
greeting cards, adjacent to one another and displays related merchandise such 
as party hats, plates, cups and napkins together within a department. 
Customers are able to easily move about the different departments and find 
specific product categories due to prominent, easy-to-read signage, bright 
lighting and wide aisles. Management believes that the Paper Warehouse store 
layout assists customers in finding and coordinating their party supply 
needs, as well as encourages browsing, impulse purchases and repeat visits.

         CUSTOMER SERVICE. Paper Warehouse seeks to provide a high level of 
customer service to enhance its customer-friendly store environment. Store 
managers and sales associates are trained to assist customers with party 
planning and event coordination. In addition, the Company provides party 
planning guides and checklists for graduation, Halloween, Hanukkah, Christmas 
and New Year's. The Company's "no hassle" return policy makes it easy for 
customers to return or exchange products, which the Company believes 
encourages customers to purchase additional quantities. Certain products that 
require additional sales assistance, such as balloons and custom printing, 
are located near checkout counters where sales associates can readily assist 
customers. Management continually monitors its level of customer service by 
regular store visits and by employing anonymous "mystery shoppers." Mystery 
shoppers visit all Company-owned stores at least once per quarter to evaluate 
personnel on various aspects of customer service, including responsiveness, 
quality of product displays and store cleanliness. A portion of store 
managers' compensation is based on the results of these mystery shopper 
surveys.

         OPERATIONS AND TRAINING. Each Company-owned store is typically 
operated by a store manager, one assistant manager and a varying number of 
full-time and part-time sales associates, depending on the store size, sales 
volume and selling season. Store managers are responsible for all aspects of 
the store's day-to-day operations, including employee hiring and training, 
work scheduling, expense control and customer service. These managers report 
to a district or operations manager, each of whom is responsible for 
approximately 10 to 18 stores. Within each geographic market, the Company 
uses floating managers to assist in smaller stores that cannot support both a 
store manager and an assistant manager. In addition, floating managers 
support store managers during busy holiday seasons and substitute for store 
managers during vacations and other absences. The floating managers also work 
with newly hired store managers to ensure a smooth transition for sales 
personnel and customers.

         Prior to the opening of a new Company-owned store, store managers 
are usually trained intensely for two weeks, depending on prior experience, 
and receive additional on-going training. During the new store set-up, a 
manager receives additional training from the Company's district management 
team. After the store opening, corporate headquarters personnel spend 
considerable time overseeing the operations. Each district has a dedicated 
trainer who visits the stores to work with the store managers, reinforcing 
prior training and providing on-going training. Periodic training sessions 
are scheduled for store managers in the central or district offices on 
various topics, including human resources, merchandising, loss prevention and 
employee supervision. Additional training topics are covered at monthly 
managers' meetings and through monthly mailings and the Company's monthly 
newsletter.

         Paper Warehouse stores are typically open from 9:00 a.m. to 9:00 
p.m. Monday through Friday, from 9:00 a.m. to 6:00 p.m. on Saturday and from 
11:30 a.m. to 5:00 p.m. on Sunday.

                                      -3-
<PAGE>


SITE SELECTION AND LOCATIONS

         SITE SELECTION. In order to efficiently cluster stores in 
metropolitan markets, the Company has developed a site selection process that 
examines various criteria, including population density, demographics, 
traffic counts, storefront visibility and presence, local competition, lease 
rates and parking availability. The Company locates its stores in or near 
visible high traffic strip mall centers in close proximity to prominent mass 
merchandise, discount or grocery store anchors. The Company's strategy of 
clustering stores in metropolitan markets promotes customer convenience and 
creates favorable economies of scale for marketing, advertising and 
operations.

         LOCATIONS.   As  of   January   29, 1999,  Paper Warehouse had 97  
Company-owned stores in the following locations:

<TABLE>
<CAPTION>
         LOCATIONS                                                                      NUMBER OF STORES
         ---------                                                                      ----------------
<S>                                                                                     <C>
         Arizona
              Tucson Metropolitan Area........................................                         4
         Colorado
              Denver Metropolitan Area........................................                        13
              Colorado Springs................................................                         1
         Iowa
              Des Moines Metropolitan Area....................................                         4
              Cedar Falls.....................................................                         1
              Fort Dodge......................................................                         1
              Iowa City.......................................................                         1
              Sioux City......................................................                         1
         Kansas/Missouri
              Kansas City Metropolitan Area...................................                        16
              Columbia........................................................                         1
              Salina..........................................................                         1
              St. Joseph......................................................                         1
         Minnesota
              Minneapolis/St. Paul Metropolitan Area..........................                        26
              Mankato.........................................................                         1
              Rochester.......................................................                         1
              St. Cloud.......................................................                         1
         Nebraska
              Omaha Metropolitan Area.........................................                         2
         Oklahoma
              Oklahoma City Metropolitan Area.................................                         8
              Tulsa...........................................................                         4
         Washington
              Seattle Metropolitan Area.......................................                         7
         Wisconsin
              Onalaska........................................................                         1
              Eau Claire......................................................                         1
                                                                                                      --

         TOTAL COMPANY - OWNED STORES.........................................                        97
                                                                                                      --
                                                                                                      --
</TABLE>

                                      -4-
<PAGE>

MERCHANDISING

         The Company offers a broad selection of party supplies and paper 
goods for a wide variety of celebratory occasions and everyday uses, 
including birthdays, weddings, baby showers, graduations and other family and 
religious celebrations, as well as seasonal events such as Valentine's Day, 
Easter, Fourth of July, Halloween, Thanksgiving, Christmas, Hanukkah and New 
Year's. Through its 8,500 square foot store prototype, the Company offers a 
comprehensive selection of over 19,000 SKUs, providing customers the 
convenience of one-stop shopping for all party supplies and paper goods. The 
Company's merchandise is organized by party themes, and the prominent signage 
and wide aisles allow customers easy access to coordinate the merchandise 
required for all party occasions. The Company also believes that its 
extensive selection, combined with high in-stock positions, often stimulates 
customers to purchase additional products.

         The Company's merchandise offering consists of the following:

         PARTY SUPPLIES. The Company offers an extensive selection of 
complementary and coordinating party supplies in unique and traditional 
patterns, colors and designs. The Company's party supplies include 
invitations, plates, napkins, party favors, streamers, banners, candles, 
balloons, party snacks and seasonal novelties such as Halloween costumes and 
Christmas decor. The Company's 8,500 square foot store prototype offers over 
140 ensembles of party goods for many occasions, which include party hats, 
plates, napkins and cups. A significant portion of the Company's party goods 
ensembles involves the use of movie and television figures, animated 
characters and celebrity likenesses licensed to the manufacturer of such 
ensembles.

         GIFT WRAPPING PRODUCTS. The Company offers a wide assortment of gift 
wrapping products in various patterns and colors, including gift wrap, gift 
bags, gift boxes, tissue paper, ribbons, bows, shred and gift tags. In 
addition to holiday selections, the Company offers distinctive gift packaging 
products for special occasions such as birthdays, graduations, weddings, baby 
showers and other family and religious celebrations.

         GREETING CARDS. The Company features a wide variety of special 
occasion, seasonal and everyday greeting cards. The Company's 8,500 square 
foot prototype store offers over 10,000 titles. The Company carries 
traditional, humorous and contemporary brand name greeting cards at 
significantly lower prices than national greeting card chain stores.

         HOUSEHOLD AND CATERING FOOD SERVICE SUPPLIES. The Company offers 
paper supplies such as toilet paper, paper towels, dispenser towels, plates, 
cups, serving trays and bowls and table coverings. In addition to offering 
such products to the Company's regular party goods customers, the Company is 
a paper product supplier for many commercial users of paper products, 
including catering companies and non-profit organizations.

         The Company provides customers with everyday low pricing on all 
products, at discounts ranging from 10% to 50% off the manufacturer's 
suggested retail price. In addition, the Company guarantees that it will meet 
or beat any advertised price on the products it offers. The Company 
reinforces its everyday low price strategy with signs prominently displayed 
throughout its stores and extensive promotional advertising.

                                      -5-
<PAGE>

PRODUCT SOURCING AND INVENTORY MANAGEMENT

         The Company purchases its merchandise from approximately 150 
suppliers. In fiscal 1998, the Company's largest supplier, Amscan Holdings, 
Inc., accounted for approximately 14% of the Company's purchases and the 8 
largest suppliers represented approximately 51% of the Company's purchases. 
The Company does not have long-term purchase commitments or exclusive 
contracts with any of its suppliers. Management believes that alternative 
sources of product are available at comparable terms and conditions. The 
Company considers numerous factors in supplier selection, including price, 
payment terms, product offerings and product quality.

         The Company negotiates pricing with suppliers on behalf of all 
Company-owned and franchise stores and believes that its buying power enables 
it to receive favorable pricing terms and to more readily obtain high demand 
merchandise. Although franchise stores are responsible for purchasing their 
own inventory, franchisees are able to make purchases on the Company's 
negotiated pricing terms. As the Company adds new stores, the Company 
believes it will increase the volume of its inventory purchases and benefit 
further from increased discounts and trade allowances and more favorable 
payment terms from its suppliers.

         More than 95% of the Company's merchandise is shipped directly from 
the supplier to the Company's stores. Drop shipment of merchandise provides 
the Company with flexibility in pursuing new markets without the geographical 
constraints and costs associated with a central distribution system. 
Deliveries are processed and inventory items are inspected, sorted and priced 
in a segregated receiving area in the back of the store (approximately 10% of 
total gross square feet per store) before being placed on the selling floor. 
The Company believes that it realizes substantial savings by not maintaining 
a central distribution system.

         In addition, the Company uses cross-dock distribution for suppliers 
that will not ship directly to each store, such as overseas suppliers, and to 
facilitate opportunistic volume purchases. The Company maintains space for 
cross-dock distribution in each of the Company's principal metropolitan 
markets, including Minneapolis/St. Paul, Denver, Kansas City, Oklahoma City, 
Tucson, Omaha and Seattle, for separation and redistribution to the other 
Paper Warehouse stores within that market. The Company's primary cross-dock 
facility in Minneapolis is designed for the separation and distribution of 
merchandise system wide.

ADVERTISING AND MARKETING

         The Company maintains aggressive advertising and marketing programs. 
The Company's strategy of clustering stores in metropolitan markets enables 
it to cost effectively employ a variety of media. The Company advertises 
primarily through newspaper, direct mail inserts and radio. Paper Warehouse 
also promotes products through the use of direct mail mini-catalogs as well 
as through in-store coupon books and party planning aids.

         The Company's advertising efforts are designed to educate consumers 
about its convenient store locations, promote the breadth and value of its 
product offering and stress the customer service levels of its sales 
associates. The Company's advertising consists primarily of full color 
newspaper and direct mail inserts designed around major holidays and the 
spring and summer seasons. For fiscal 1998, the Company distributed 17 
newspaper and direct mail inserts. Inserts are supplemented by radio 
advertising for New Year's, Easter, the spring season, Graduation, Halloween, 
and Christmas. In addition, Paper Warehouse typically advertises the opening 
of new stores in newspaper and direct mail inserts as well as on radio.

                                      -6-
<PAGE>

         Management has initiated a targeted direct mail program to increase 
sales for special events. The Company currently mails mini-catalogs of 
wedding and graduation party goods to brides-to-be and families of high 
school graduates. Management has recently expanded this direct mail program 
to other special occasions such as a child's first birthday, and to 
organizations purchasing basic party and paper goods for commercial or 
institutional use. The Company's institutional customers include a variety of 
small businesses, caterers, food service companies, schools, synagogues, 
churches, civic groups and other organizations.

         For fiscal 1998, the Company spent approximately 75% of its 
marketing budget on full color newspaper and direct mail inserts, 
approximately 20% for television and radio advertising and the remainder on 
direct mail mini-catalogs and in-store sales promotions.

INFORMATION SYSTEMS

         The Company's information systems are integral to the Company's 
continued expansion and enhancing its competitive position in the industry. 
The Company completed the installation of Point of Sale ("POS") terminals in 
all its Company-owned stores in the third quarter of fiscal 1996. The POS 
terminals allow price lookup and inventory tracking by SKU. By polling 
transaction data nightly from each store's POS terminals, the system provides 
daily sales information and inventory levels at the store, department, class 
and SKU level, allowing the corporate office to monitor daily sales, gross 
profit, pricing and inventory by SKU across its entire store base. Also, the 
Company's automatic merchandise replenishment system uses this information to 
allocate goods to individual stores based on specific SKU requirements.

         The Company completed the installation of JDA Retail Software 
Package in the first quarter of fiscal 1998. The JDA Retail Software Package 
operates on an IBM AS/400 platform, which required the Company to purchase 
new hardware. Switching hardware platforms provided the Company the benefit 
of parallel operations during the conversion process. In addition, the 
Company has made extensive use of JDA's Minneapolis consulting office in both 
the implementation and data conversion process.

         The JDA system supports the complete range of retail cycle functions 
in the areas of finance, merchandising and distribution, providing management 
with more sophisticated tools to utilize the information collected by its POS 
terminals. The Company's previous information systems were already performing 
most of the functions of the JDA Retail Software Package; however, management 
believes JDA has improved the efficiency of these tasks. In addition, the 
Company plans to develop enhancements such as data warehousing and electronic 
data interchange to improve the Company's ability to systematically manage 
its inventory.

                                      -7-
<PAGE>

FRANCHISING

         The Company has offered franchises of its Paper Warehouse store 
concept since October 1987. As of January 29, 1999, the Company had 46 
franchise stores located in the following states:

<TABLE>
<CAPTION>
         LOCATIONS                                                             NUMBER OF STORES
         ---------                                                             ----------------
<S>                                                                            <C>
         Arizona.........................................................             1
         Colorado........................................................             5
         Florida.........................................................             1
         Georgia.........................................................             2
         Illinois........................................................             3
         Iowa............................................................             2
         Kansas..........................................................             2
         Kentucky........................................................             1
         Louisiana.......................................................             4
         Maryland........................................................             1
         Minnesota.......................................................             1
         Mississippi.....................................................             1
         Missouri........................................................             1
         Montana.........................................................             2
         Nebraska........................................................             3
         Nevada..........................................................             1
         North Dakota....................................................             4
         South Dakota....................................................             5
         Tennessee.......................................................             1
         Texas...........................................................             3
         Wyoming.........................................................             2
                                                                                     --
         TOTAL FRANCHISE STORES..........................................            46
                                                                                     --
                                                                                     --
</TABLE>

         The Company establishes franchise stores in markets that are not 
contiguous to metropolitan areas with Company-owned stores. In addition, the 
Company grants development rights in metropolitan markets where the Company 
does not plan to open Company-owned stores. The Company believes that these 
markets typically are not served adequately by the party goods industry. In 
addition to generating franchise revenues, franchise stores benefit the 
Company through increased name recognition and increased buying power from 
its suppliers.

         The Company assists franchisees in all aspects of opening and 
operating a Paper Warehouse store. During the pre-opening phase, the Company 
support includes site evaluation and assistance with lease negotiations, 
store build-out assistance, fixture, equipment, supplies and inventory 
procurement, opening advertising materials and operations training. The 
Company provides its franchisees with ongoing services such as business 
planning, operations and promotional activities. In addition, the Company 
performs the merchandising process for its franchisees. The Company makes 
periodic inspections of its franchise stores to ensure that the franchisee is 
complying with the Company's various requirements and quality standards. The 
Company may, in the future, enter into multiple store development agreements 
with franchisees granting to them certain exclusive rights to develop stores 
in specified markets, so long as the franchisee meets a stated development 
schedule and complies with other provisions of the development agreement and 
the franchise agreement.

         Paper Warehouse franchise revenues are comprised of initial franchise
fees and continuing royalty payments. The Company's current initial franchise
fee ranges from $19,000 to $25,000 for new 

                                       -8-
<PAGE>

franchisees, depending on the type of store. The Company offers a special 
discount franchise fee for developers opening multiple stores. If a 
franchisee enters into a second or third franchise agreement it will receive 
a discount on the initial fee associated with the second or third store. 
Franchisees are also required to pay the Company a continuing royalty equal 
to a percentage of their weekly gross sales. Historically, this percentage 
has varied from 3% to 5%. Currently, new franchises pay the Company a 
continuing royalty of 4% of gross sales.

         The franchisee's initial investment depends primarily upon store 
size. This investment includes the initial franchise fee, real estate and 
leasehold improvements, fixtures and equipment, signs, point-of-sale systems, 
deposits and business licenses, initial inventory, opening promotional 
expenses and working capital. The Company may also require franchisees to pay 
a weekly advertising fee not to exceed 1% of gross sales, although to date it 
has not required such fee. Each franchisee is granted a license from the 
Company for the right to use certain intellectual property rights, including 
the mark PAPER WAREHOUSE or PARTY UNIVERSE and related designs. The Company's 
franchise agreements provide for a ten-year term and contain conditional 
renewal options.

COMPETITION

         The party and paper supply retailing business is highly competitive. 
In order to compete successfully against other party good retailers, the 
Company believes it must maintain convenient locations, broad merchandise 
selections, and competitive pricing and strong customer service. Paper 
Warehouse stores compete with a variety of smaller and larger retailers, 
including specialty party supply retailers, other superstores such as Party 
City and Factory Card Outlet, card shops such as Hallmark and designated 
departments in mass merchandisers, discount retailers, toy stores, drug 
stores, supermarkets and department stores such as Target and Wal-Mart. Many 
of these competitors have substantially greater financial and personnel 
resources than the Company. The Company may also encounter additional 
competition from new entrants in the future in the Company's existing or 
planned new markets. Increased competition by existing or future competitors 
may have a material adverse effect on the Company.

TRADEMARKS AND SERVICE MARKS

         The marks PAPER WAREHOUSE and PARTY UNIVERSE are federally 
registered trademarks owned by the Company. The Company is aware of the 
common law usage of the name PAPER WAREHOUSE by several companies in various 
parts of the United States, which may prevent the Company from using that 
name in certain regional markets. In markets where PAPER WAREHOUSE cannot be 
used by the Company, it intends to use the name PARTY UNIVERSE, for 
Company-owned and franchise stores. Because of the Company's regional 
approach to advertising and store clustering, the Company believes that the 
use of a single trademark within each market is more important to its growth 
and business strategy than the use of one mark nationally.

GOVERNMENT REGULATION

         As a franchiser, the Company must comply with rules and regulations 
adopted by the Federal Trade Commission and with state laws that regulate the 
offer and sale of franchises. The Company also must comply with a number of 
state laws that regulate certain substantive aspects of the 
franchiser-franchisee relationship. These laws regulate the franchise 
relationship, for example, by requiring the franchisor to deal with its 
franchisees in good faith, by prohibiting interference with the right of free 
association among franchisees and by regulating illegal discrimination among 
franchises with regard to charges, royalties or fees. To date, those laws 
have not precluded the Company from seeking franchisees in any given area and 
have not had a material adverse effect on the Company's operations.

                                       -9-
<PAGE>

         All Paper Warehouse stores must comply with regulations adopted by 
federal agencies and with licensing and other regulations enforced by state 
and local health, sanitation, safety, fire and other departments. More 
stringent and varied requirements of local governmental bodies with respect 
to zoning, land use and environmental factors and difficulties or failures in 
obtaining the required licenses or approvals can delay and sometimes prevent 
the opening of a new store. In addition, the Company must comply with the 
Fair Labor Standard Act and various state laws governing matters such as 
minimum wage, overtime and other working conditions. The Company also must 
comply with the provisions of the Americans with Disabilities Act of 1990, 
which generally requires that employers provide reasonable accommodation for 
employees with disabilities and that stores be accessible to customers with 
disabilities.

EMPLOYEES

         As of January 29, 1999, the Company employed approximately 320 
full-time and approximately 680 part-time employees. The Company considers 
its relationships with its employees to be good. None of the Company's 
employees are covered by a collective bargaining agreement.

CERTAIN RISKS

         In addition to factors discussed elsewhere in this Form 10-K, the 
following are important factors that could cause actual results or events to 
differ materially from those contained in any forward-looking statement made 
by or on behalf of the Company.

         RISKS ASSOCIATED WITH GROWTH

         The Company's ability to increase its sales and net earnings will 
depend in part on its ability to open stores in new and existing markets and 
to operate such stores on a profitable basis. Paper Warehouse, which 
currently operates 97 Company-owned stores, opened 27 Company-owned stores 
during fiscal 1998 and 9 Company-owned stores during fiscal 1997. In fiscal 
1999, Paper Warehouse expects to open fewer than 10 Company-owned stores. 
These new stores are expected to be opened in existing markets where the 
Company currently has Company-owned stores. If satisfactory sites are not 
available in such markets or there is a change in the competitive 
environment, alternative markets may be selected. Two of the Company's 
primary competitors currently have several stores in these markets.

         RISK OF OPENING NEW STORES

         The Company's planned expansion in existing markets is subject to 
many risks, including, but not limited to, failure to identify or the 
unavailability of suitable sites on acceptable lease terms and the failure to 
obtain qualified management and other store personnel. Operating stores in 
different geographic markets may present competitive and merchandising 
challenges that are different from those currently faced by the Company in 
its existing geographic markets. Such challenges include adapting to local 
tastes and customs as well as competing against local established and 
familiar businesses that may have innovative or other unique techniques for 
marketing party supplies and paper goods. The Company's expansion plans may 
also place significant demands on the Company's management, financial 
controls, operations and information systems and may cause the Company to 
incur higher costs relating to marketing and operations. The Company's 
expansion plans will also require an increase in Company personnel, 
particularly store managers and sales associates to operate the Company's new 
stores. There can be no assurance that the Company will be able to continue 
to attract, develop, train and retain the personnel necessary to pursue and 
maintain its growth and business strategies.

         The Company's continued growth will depend on its ability to 
increase sales in its existing stores. The opening of additional 
Company-owned stores in existing markets could reduce sales from existing 

                                       -10-
<PAGE>

stores located in or near those markets. Although the Company believes it has 
planned carefully for the implementation of its expansion program, there can 
be no assurance that such plans can be executed as presently envisioned or 
that the implementation of those plans will not have an adverse effect on the 
Company's business, financial condition and results of operations.

         RISK OF REMODELING/RELOCATING EXISTING STORES

         The Company plans, in fiscal 1999, to remodel approximately 20 
stores and relocate 4 existing stores is subject to many risks including, but 
not limited to, loss of sales during the remodeling or relocation period, 
cost overruns of the remodeling or relocation and failure to achieve 
increased sales after the remodeling or relocation. Stores are remodeled 
periodically to maintain a fresh look for the customer, standardize store 
layout and fixtures, and improve merchandise presentation. Remodeling may be 
as simple as repainting or new signage to as extensive as a total makeover. 
Stores are relocated when the store is small and there is no room to expand 
at the existing location, the lease expires, or when a store is not 
performing in its present location and a better location is available. 
Although the Company believes it has planned carefully for the implementation 
of its remodeling and relocation program, there can be no assurance that such 
plans can be executed as presently envisioned or that the implementation of 
those plans will not have an adverse effect on the Company's business, 
financial condition and results of operations.

         POTENTIAL NEED FOR ADDITIONAL FINANCING

         The Company believes that the combination of cash flow from 
operations and available borrowing capacity under a revolving credit 
facility, will be adequate to handle its cash requirements through fiscal 
1999, including the cash needed to open new stores. The Company's current 
revolving line of credit expires May 31, 1999. The Company has typically 
renegotiated its revolving line of credit in the spring as it is doing this 
year. The Company also anticipates that additional cash will be needed in the 
ordinary course of business to support its growth, and is currently 
negotiating with a prospective lender to replace its existing revolving 
credit facility. The Company expects consummation of the replacement 
revolving line of credit by the time the current revolving line of credit 
expires. No assurance can be given that additional financing will be 
available or will be available on terms favorable to the Company. Failure of 
the Company to extend its current revolving credit facility and to secure 
replacement financing could have a material adverse effect on the Company.

         HIGHLY COMPETITIVE MARKET

         The party supplies and paper goods retailing business is highly 
competitive. Paper Warehouse stores compete with a variety of smaller and 
larger retailers, including specialty party supply retailers (including other 
superstores), card shops and designated departments in mass merchandisers, 
discount retailers, toy stores, drug stores, supermarkets and department 
stores. Many of the Company's competitors have substantially greater 
financial and personnel resources than the Company. The Company may also 
encounter additional competition from new entrants in the future in the 
Company's existing markets. Increased competition by existing or future 
competitors may have a material adverse effect on the Company.

         RISK OF POTENTIAL ACQUISITIONS

         As part of its growth strategies, the Company periodically considers 
strategic acquisitions of other retail stores or chains in the party supply 
industry. As of the date of this Annual Report on Form 10-K, the Company has 
no existing agreements or commitments to affect any material acquisitions. 
There can be no assurance that suitable acquisition candidates will be 
identified, that acquisitions can be consummated or that new stores acquired 
through such acquisitions can be operated profitably or integrated 
successfully into the Company's operations. Further, growth through 
acquisition entails certain risks to the Company, including unanticipated 
business uncertainties, diversion of management attention, legal liabilities 
and significant costs and expenses to the Company to complete the 
acquisition,

                                       -11-
<PAGE>

any of which could have a material adverse effect on the Company's business, 
financial condition and results of operations.

         RISK OF SEASONAL AND QUARTERLY REVENUE AND OPERATING FLUCTUATIONS

         The Company's results of operations have historically fluctuated 
from quarter to quarter for such reasons as seasonal variations in revenues 
and operating expenses, the amount and timing of revenues contributed by new 
Company-owned and franchise stores, the costs associated with the opening of 
new stores and expenses incurred to support the Company's expansion strategy. 
As a result of these seasonal variations, a significant portion of the 
Company's operating income is generated in the second and fourth fiscal 
quarters. Historically, the Company has engaged in more promotional activity 
during the third quarter than the second quarter, which results in reduced 
operating income for the third quarter as compared to the second quarter. Any 
factors negatively affecting the Company during the second and fourth fiscal 
quarters could have a material adverse effect on the Company's financial 
condition and results of operations for the entire fiscal year. Further, as a 
result of the seasonality of the Company's revenue, the Company expects to 
incur a loss in the first quarter of each year for the foreseeable future.

         RISKS ASSOCIATED WITH FRANCHISEES

         During fiscal 1999 the Company plans to establish approximately 15 
new franchise stores. The continued growth and success of the Company is 
dependent in part upon its ability to attract, contract with and retain 
qualified franchisees and the ability of those franchisees to operate their 
stores successfully and promote and develop the Paper Warehouse store 
concept. Although the Company has established criteria to evaluate 
prospective franchisees and the Company's franchise agreements include 
certain operating standards, each franchisee operates its store independently 
and the Company is limited in its ability to influence day-to-day store 
operations. There can be no assurance that franchisees will be able to 
operate Paper Warehouse stores successfully in their franchise areas in a 
manner consistent with the Company's concepts and standards. Accordingly, the 
Company's franchisees could operate their stores in a manner that reduces the 
gross revenues of such stores, and therefore reduces the franchise revenue 
received by the Company.

         FAILURE TO ANTICIPATE AND/OR RESPOND TO MERCHANDISING TRENDS

         The Company's success depends, in part, on its ability to anticipate 
and respond, in a timely manner, to changing merchandise trends and consumer 
demands. The Company makes merchandising decisions well in advance of the 
seasons when such merchandise will be sold. Accordingly, any delay or failure 
by the Company in identifying and responding to emerging trends could 
adversely effect consumer acceptance of the merchandise in the Company's 
stores, which would have a material adverse effect on the Company's business, 
financial condition and results of operations. Certain licensed products sold 
by the Company are in great demand for short time periods making it difficult 
to project inventory needs for such products. Significant deviations from 
projected demand for its products, in particular licensed products, could 
have a material adverse effect on the Company's business, financial condition 
and results of operations, either from lost sales due to insufficient 
inventory, higher carrying costs associated with slower turning inventory or 
reduced or eliminated margins due to the need to mark down excess inventory.

         DEPENDENCE ON SUPPLIERS

         The Company purchases its merchandise from approximately 150 
suppliers. For the fiscal year ended January 29, 1999, the Company's largest 
supplier accounted for approximately 14% of the Company's purchases and the 8 
largest suppliers represented approximately 51% of the Company's purchases. 
The Company's future success is partially dependent upon its ability to 
maintain good

                                       -12-
<PAGE>

relationships with its principal suppliers. Many of the Company's principal 
suppliers currently provide the Company with certain incentives, such as 
volume purchasing allowances and trade discounts. A reduction or 
discontinuance of these incentives could have a material adverse effect on 
the Company. The Company does not have long-term contracts with any of its 
suppliers, and any supplier could discontinue selling to the Company at any 
time. While the Company believes its supplier relationships are good, the 
failure by the Company to maintain good relationships with its principal 
suppliers could have a material adverse effect on the Company's business, 
financial condition or results of operations.

         EFFECT OF CHANGES IN CONSUMER PREFERENCES AND ECONOMIC CONDITIONS

         The party goods business would be adversely affected if consumer 
demand for single-use, disposable party goods were to diminish. For example, 
if cost increases in raw materials such as paper or plastic were to cause the 
Company's prices to increase significantly, consumers might decide to forgo 
the convenience associated with single-use, disposable products and use 
standard dinnerware and flatware. Similarly, changes in consumer preferences 
away from disposable products and in favor of reusable products for 
environmental or other reasons could reduce the demand for the Company's 
products. In addition, future adverse changes in economic conditions 
affecting disposable consumer income, such as employment levels, the rate of 
inflation, interest rates and taxation, could have an adverse effect on the 
party goods business. Because its operations are located principally in seven 
metropolitan areas, the Company is also subject to certain regional risks, 
such as the economy, weather conditions, natural disasters and governmental 
regulations. If any region in which the Company operates stores were to 
suffer an economic downturn or other adverse regional events were to occur, 
there could be an adverse impact on the Company's sales and profitability and 
its ability to implement its planned expansion programs.

         GOVERNMENT REGULATION

         The Company, as a franchiser, is subject to regulation by the 
Federal Trade Commission and also must comply with state laws regulating the 
offer and sale of franchises and limiting the Company's ability to terminate 
or refuse to renew franchises. The failure to obtain or maintain approvals to 
sell franchises could adversely affect the Company. The Company and its 
franchisees are subject to laws governing their relationships with employees, 
including minimum wage requirements, overtime, working and safety conditions 
and citizenship requirements. Because a significant number of the Company's 
employees are paid at rates related to the federal minimum wage, increases in 
the minimum wage would increase the Company's labor costs.

         CONTROL BY MANAGEMENT

         Yale T. Dolginow, President and Chief Executive Officer, and Brent 
D. Schlosser, Executive Vice President, own or have the right to vote and 
control the disposition of 41.1% of the Company's outstanding Common Stock. 
Accordingly, these persons, acting together, may have the ability to elect 
the Company's directors and determine the outcome of other corporate actions 
requiring shareholder approval. Such control by Mr. Dolginow and Mr. 
Schlosser could have the effect of delaying, deferring or preventing a change 
in control of the Company.

                                       -13-
<PAGE>

         POSSIBLE VOLATILITY OF STOCK PRICE

         The market price for the Company's Common Stock may be volatile and 
fluctuate depending on various factors, including the general economy, stock 
market conditions, analyst recommendations, news announcements concerning the 
Company or the party supplies and paper goods industry, variations in the 
Company's quarterly and annual operating results and other factors. The stock 
market in general, and the market for shares of small capitalization stocks 
in particular, have experienced significant price and volume fluctuations 
that often have been unrelated to the operating performance of particular 
companies. These market fluctuations may adversely effect the market price of 
the Company's Common Stock.

         POSSIBLE ISSUANCE OF PREFERRED STOCK

         Pursuant to the Company's Amended and Restated Articles of 
Incorporation, the Board of Directors has authority to fix the rights, 
preferences, privileges and restrictions, including voting rights, of any 
shares of the Company's preferred stock and to issue such stock without any 
further vote or action by the shareholders. The rights of the holders of 
Common Stock will be subject to, and may be adversely affected by, the rights 
and preferences of the holders of any shares of preferred stock that the 
Board of Directors may create and issue in the future. The issuance of any 
such preferred stock could have the effect of delaying, deferring or 
preventing a change in control of the Company. In addition, certain 
provisions of Minnesota law applicable to the Company could have the effect 
of discouraging certain attempts to acquire the Company, which could deprive 
the Company's shareholders of opportunities to sell their shares of Common 
Stock at prices higher than prevailing market prices and may also have a 
depressive effect on the market price of the Company's Common Stock.

         LABOR CONDITIONS

         The Company's performance is dependent on attracting and retaining a 
large and growing number of quality employees. Many of these employees are in 
entry level or part time positions with historically high rates of turnover. 
The Company's ability to meet its labor needs while controlling costs is 
subject to external factors such as unemployment levels, minimum wage 
legislation, and changing demographics.

         S-CORPORATION STATUS; DISTRIBUTIONS

         Since 1993 and until the Company's initial public offering, the 
Company was treated as an S-Corporation under the Internal Revenue Code of 
1986 as amended (the "Code"). In connection with the public offering, the 
Company converted to a C-Corporation in November 1997. The Company believes 
that it has met the S-Corporation requirements and, as of the date hereof, 
the Internal Revenue Service (the "IRS") and other applicable state taxing 
authorities have not challenged the Company's S-Corporation status. If, for 
any reason, the Company were subsequently determined by the IRS or other 
applicable state taxing authorities not to have met S-Corporation 
requirements, the Company could be liable to pay corporate taxes on its 
income at the effective corporate tax rate for all or a part of the period 
from February 1, 1993 through the consummation of the initial public 
offering, plus interest and possibly penalties.

                                      -14-
<PAGE>

ITEM 2.  PROPERTIES.

         The Company purchased an approximate 23,000 square foot building for 
its headquarters and cross-dock facility in Minneapolis, Minnesota in 1995. 
As of January 29, 1999, the secured debt on such property was $887,664, of 
which $492,383 was owed to Richfield Bank & Trust Co. and $395,281 was owed 
to the U.S. Small Business Administration. Richfield Bank & Trust Co. holds a 
first mortgage on such property and the U.S. Small Business Administration 
holds a second mortgage. The U.S. Small Business Administration's second 
mortgage is also guarantied by Yale T. Dolginow. Paper Warehouse currently 
leases the locations for its 97 Company-owned stores. The Company anticipates 
that its new Company-owned stores will typically have ten-year leases with at 
least one five-year renewal option.

         On April 8, 1999, the Company refinanced its corporate office 
building. The $1.1 million term note is payable in monthly installments of 
$8,612, including interest at 7.125%, through May 2009. The note is secured 
by a first mortgage on the Company's office headquarters.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any material litigation and is not 
aware of any threatened litigation that would have a material adverse effect 
on its business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matter was submitted to a vote of the Company's security holders 
during the fourth quarter of the fiscal year ended January 29, 1999.

                                    -15-

<PAGE>

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

         The executive officers of the Company, their ages and the offices 
held, as of March 1, 1999 are as follows:

<TABLE>
<CAPTION>
                 NAME                           AGE                                 POSITION
                 ----                           ---                                 --------
<S>                                             <C>         <C>
Yale T. Dolginow                                56          President, Chief Executive Officer and Director

Brent D. Schlosser                              45          Executive Vice President and Director

Cheryl W. Newell                                45          Vice President and Chief Financial Officer

Diane C. Dolginow                               55          Secretary and Director

Steven P. Durst                                 30          Vice President of Merchandising

Michael A. Anderson                             38          Controller/Treasurer

Steven R. Anderson                              52          Vice President and Chief Information Officer

Carol A. Carroll                                48          Vice President of Stores

Willard V. Lewis                                63          Vice President of Store Development

Francis E. O'Neil                               64          Vice President of Franchising

Kristen Lenn                                    31          Director of Human Resources
</TABLE>

                  YALE T. DOLGINOW has been President, Chief Executive 
Officer and a Director of the Company since 1986. From 1982 to 1986, Mr. 
Dolginow served as President and Chief Executive Officer of Carlson Catalog 
Showrooms, Inc., which was a chain of 59 catalog showrooms located throughout 
the Midwest. From 1981 to 1982, Mr. Dolginow served as Assistant to the 
President of Dayton Hudson Corporation. From 1978 to 1980, Mr. Dolginow 
served as President of Modern Merchandising, Inc., a 70-store retail chain 
operating in several markets, and as Executive Vice President from 1977 to 
1978. From 1968 until 1976, Mr. Dolginow was the Chief Executive Officer and 
President of Dolgin's, Inc., a chain of catalog showroom stores that operated 
in the Kansas City and St. Louis metropolitan markets. Mr. Dolginow and Diane 
C. Dolginow are husband and wife.

                  BRENT D. SCHLOSSER has been Executive Vice President and a 
Director of the Company since 1986. From 1982 to 1986, Mr. Schlosser served 
in various capacities, including Vice President Marketing/Buying and 
Executive Vice President Marketing/Merchandising, at Carlson Catalog 
Showrooms, Inc. From 1977 to 1982, Mr. Schlosser served as Director of 
Marketing for Modern Merchandising, Inc. From 1975 to 1977, Mr. Schlosser was 
advertising director for Dolgin's, Inc.

                  CHERYL W. NEWELL has been Vice President and Chief 
Financial Officer of the Company since August 1997. From 1991 to August 1997, 
Ms. Newell was a Vice President with the Corporate Banking Group at U.S. 
Bancorp, a bank holding company, responsible for management of desktop 
technology, disaster recovery and training and development. From 1986 to 
1991, Ms. Newell was a Vice President with Citicorp, a bank holding company. 
From 1976 to 1986, Ms. Newell was a Vice President at Norwest Bank k.n.a. 
Wells Fargo Corporation.

                                       -16-

<PAGE>

                  DIANE C. DOLGINOW has been a Director of the Company since 
1986 and Secretary since August 1997. Ms. Dolginow was a Director of Dolgin's 
Inc. from 1968 to 1976, and since 1994 has been a Director on the National 
Advisory Board of School of Education at University of Kansas. Ms. Dolginow 
and Mr. Dolginow are husband and wife.

                  STEVEN P. DURST has been Vice President of Merchandising 
since June 1998. Prior to that time and since 1997 Mr. Durst was Vice 
President of Information Systems for the Company. From 1995 to 1997 Mr. Durst 
served as Director of Information Systems for the Company. From 1990 to 1995 
Mr. Durst was employed by Exxon Corporation where he performed various 
engineering and business planning functions. Mr. Durst is the son-in-law of 
Mr. and Mrs. Dolginow.

                  MICHAEL A. ANDERSON has served as Controller/Treasurer of 
the Company since 1997. Prior to that time and since 1991, Mr. Anderson was 
Controller of the Company. From 1987 to 1991, Mr. Anderson was an accountant 
at Luri, Eiger, Besikof & Company, a Minneapolis public accounting firm. From 
1982 to 1986, Mr. Anderson was a staff accountant with Marvin O. Anderson, 
LPA, a public accounting firm located in Minnesota.

                  STEVEN R. ANDERSON has served as Vice President and Chief 
Information Officer of the Company since December 1998. From May 1997 until 
June 1998, Mr. Anderson was Senior Vice President and Chief Information 
Officer for County Seat, a publicly-held specialty soft goods retailer. From 
1986 to 1997, Mr. Anderson held a number of information systems positions, 
including Senior Vice President and Chief Information Officer at Best Buy 
Co., a publicly-held specialty retailer.

                  CAROL A. CARROLL has been Vice President of Stores of the 
Company since 1997. Prior to that time and since 1994, Ms. Carroll was 
Director of Stores of the Company. From 1992 to 1994, Ms. Carroll was 
Director of Stores of CBR, Inc., a privately-owned retailer, specializing in 
airport retail. From 1976 to 1992, Ms. Carroll served as a District Manager, 
managing 17 stores in a five-state area, for Best Products, Inc.

                  WILLARD V. LEWIS has been Vice President of Store 
Development of the Company since 1997. Prior to that time and since 1992, Mr. 
Lewis was Director of Development. From 1990 to 1992, Mr. Lewis served as 
Vice President of Network Facilities Professionals, Inc., a Minnesota-based 
computer software firm. Mr. Lewis was employed by Dolgin's, Inc. from 1970 to 
1985, served as Vice President and Treasurer from 1973 to 1977 and President 
and General Manager from 1977 to 1985.

                  FRANCIS E. O'NEIL has served as Director of Franchising 
since 1997. From 1995 to 1997, Mr. O'Neil was Director of Marketing at 
Graphics Xpress, a subsidiary of Meyers Printing Co. From 1993 to 1995, Mr. 
O'Neil was a New Business Consultant at Deluxe Corporation. From 1990 to 
1993, he was Vice President of Marketing for Insty-Prints, Inc. From 1985 to 
1996, Mr. O'Neil provided consulting services to various firms, including 
Paper Warehouse as President of Franchise Forum, Inc. Mr. O'Neil has provided 
consulting services to the Company on a regular basis since 1987.

                  KRISTEN LENN has served as Director of Human Resources 
since August 1997. Prior to that time and since 1994, Ms. Lenn was a Senior 
Consultant with McGladrey & Pullen, LLP, a public accounting firm, and 
provided a wide range of human resources generalist services to clients. From 
1989 to 1994, Ms. Lenn was employed by various organizations as a human 
resources generalist.

                                       -17-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.

         RANGE OF COMMON STOCK

         The Company completed its initial public offering on November 28, 
1997. Since that date the Common Stock has been quoted on the Nasdaq National 
Market under the symbol "PWHS."

         The following table summarizes the high and low sale prices per 
share of the Company's Common Stock for the periods indicated, as reported on 
the Nasdaq National Market:

<TABLE>
<CAPTION>

         FISCAL YEAR 1998                                  HIGH           LOW
         ----------------                                  ----           ---
<S>                                                        <C>           <C>
         First Quarter                                     $7 1/4        $4 5/8
         Second Quarter                                     5 1/4         3 7/8
         Third Quarter                                      4 1/4         1 5/8
         Fourth Quarter                                     4 3/16        1 29/32

<CAPTION>
         FISCAL YEAR 1997
         ----------------
<S>                                                        <C>           <C>
         Fourth Quarter (since November 25, 1997)         $8 5/8        $5 5/8

</TABLE>

         On April 21, 1999, the last reported sale price for the Company's
Common Stock was $1.69 per share. As of April 21, 1999, the Company had 
approximately 61 holders of record of the Company's Common Stock.

         The Company has never declared or paid any cash or stock dividends 
with respect to its Common Stock. The current policy of the Company and its 
Board of Directors is to retain any earnings to provide for the growth of the 
Company.

         The Company did not have any unregistered sales of equity securities 
during the fourth quarter of fiscal 1998.

                                       -18-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The Selected Financial Data presented below should be read in 
conjunction with the Financial Statements and notes thereto included 
elsewhere in this Form 10-K, and in conjunction with "Management's Discussion 
and Analysis of Financial Condition and Results of Operations" included 
elsewhere in this Form 10-K. The Selected Financial Data as of and for the 
five years ended January 29, 1999 have been derived from the Consolidated 
Financial Statements of the Company audited by KPMG Peat Marwick LLP, 
independent auditors.
                                       
                  SUMMARY OF FINANCIAL AND OPERATING DATA
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                 Fiscal Year
                                               --------------------------------------------------------------------------------
                                                         1998            1997            1996             1995            1994
                                                         ----            ----            ----             ----            ----
<S>                                                   <C>             <C>             <C>              <C>             <C>
STATEMENT OF OPERATIONS DATA: 
   Revenues..................................         $63,491         $52,949         $43,002          $33,478         $24,084
   Operating (loss) income...................            (590)            983           2,080            1,781           1,494
   Net (loss) income.........................            (521)           (191)          1,303            1,286           1,281
   Net loss per share........................            (.11)            N/A             N/A              N/A             N/A
   Pro forma net (loss) income (1)...........             N/A            (207)            808              797             794
   Pro forma diluted net (loss) income per 
     share (1)...............................             N/A            (.08)            .32              .32             .32

OPERATING DATA:
   Number of stores open at end of period:
     Company-owned stores....................              97              73              64               55              42
     Franchise stores........................              46              51              50               53              29
     Remodeled stores........................               3               3               1                8               8
     Comparable store sales increase (2).....             2.4%            8.3%            7.8%         13.6%(3)           16.6%

BALANCE SHEET DATA:
   Working capital...........................         $ 5,212          $9,383          $1,701            $ 925          $2,301
   Total assets..............................          29,528          21,017          16,270           14,934           8,211
   Total debt (4)............................           7,864           1,217          11,240            8,021           3,619
   Total stockholders' equity................          14,090          14,594           1,793            3,124           2,646

</TABLE>
------------------------
(1)      Since February 1, 1993 through November 28, 1997, the Company had been
         an S-Corporation and during this period was not generally subject to
         corporate income taxes. The Statement of Operations data during this
         period reflects a pro forma provision for income taxes as if the
         Company was subject to corporate income taxes for such periods. This
         pro forma provision for income taxes is computed using a combined
         federal and state tax rate of 38%.

(2)      Company-owned stores enter the comparable store sales base at the
         beginning of their 13th month of operations. Stores in which retail
         square footage is increased more than 50%, or stores that are
         relocated, are no longer included in the comparable store sales base
         until 12 months have passed.

(3)      For purposes of computing the increase in comparable store sales, this
         computation assumes fiscal 1995 was a 52-week year.

(4)      Total debt consists of total current and long-term debt and does not
         include capital lease obligations.

                                       -19-
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         The following discussion of the Company's results of operations and 
its liquidity and capital resources should be read in conjunction with 
"Selected Financial Data" and the Consolidated Financial Statements and notes 
thereto included elsewhere in this Form 10-K.

OVERVIEW

         Paper Warehouse is a growing chain of stores specializing in party 
supplies and paper goods operating under the names Paper Warehouse and Party 
Universe. The current management team purchased the business in 1986 and 
incorporated the Company in Minnesota in 1987. At the time of the 
acquisition, the Company consisted of three stores located in the 
Minneapolis/St. Paul metropolitan area. In 1987, the Company began granting 
franchises. Over the past 10 years, the Company has grown to an aggregate of 
143 stores, including 97 Company-owned stores and 46 franchise stores 
throughout 24 states. In growing the number of Company-owned stores, 
management has employed a strategy of clustering stores in the Company's 
principal markets to provide its customers with convenient store locations, 
expand its total market share and achieve favorable economies of scale.

         The Company completed its initial public offering on November 28, 
1997. All 1,778,000 shares of Common Stock were offered and sold by the 
Company. Proceeds to the Company, net of offering expenses, were 
approximately $11.7 million. On December 24, 1997, the underwriters partially 
exercised their over allotment option and the Company sold an additional 
207,800 shares of Common Stock. Proceeds to the Company, net of offering 
expenses, were approximately $1.4 million. The proceeds from the sale of 
Common Stock were used to retire the Company's revolving line of credit, 
prepay subordinated debt, and retire other existing indebtedness. The balance 
of the proceeds was used to finance new store openings and fund further 
expansion.

         Prior to November 28, 1997, the Company elected to be treated for 
federal and state income tax purposes as an S-Corporation under the 
Internal Revenue Code of 1986, as amended, and comparable state tax laws. For 
the purpose of discussion and analysis, the Company has presented a pro forma 
tax provision and pro forma net income. These pro forma amounts represent 
what the income tax provision and the net income would have been if the 
Company had been a C-Corporation and thus was subject to Federal income 
taxation for the entire period. This pro forma provision is computed using a 
combined Federal and state income tax rate of 38%.

         Total revenue consists of Company-owned store sales and franchise 
revenues. Franchise revenues are generated from royalties received on sales, 
generally 4% of the store's sales, and initial franchise fees, which are 
recognized at the time the franchisee signs a lease for the store. 
Company-owned stores enter the comparable store sales base at the beginning 
of their 13th month of operations. Stores in which retail square footage is 
increased more than 50%, or stores that are relocated, are no longer included 
in the comparable store sales base until 12 months have passed. Cost of 
products sold and occupancy costs includes the direct cost of merchandise, 
plus handling and distribution, and certain occupancy costs. Store operating 
expenses include all costs incurred at the store level, such as advertising, 
credit card processing fees, and store payroll. General and administrative 
expenses include corporate administrative expense for Company-owned stores 
and expenses relating to franchising, primarily payroll, legal, travel, and 
advertising.

                                       -20-
<PAGE>

RESULTS OF OPERATIONS

FISCAL YEAR ENDED JANUARY 29, 1999 (52 WEEKS) COMPARED TO FISCAL YEAR ENDED 
JANUARY 30, 1998 (52 WEEKS)

         REVENUE. Company-owned store revenue increased 20.1% to $62.2 
million for fiscal 1998 from $51.8 million for fiscal 1997, primarily due to 
an increase in the number of Company-owned stores from 73 stores at the end 
of fiscal 1997 to 97 stores at the end of fiscal 1998. Approximately $1.1 
million of the increase in revenues was attributable to comparable store 
sales increases and approximately $9.3 million was attributable to new and 
remodeled Company-owned stores. Comparable store sales increased 2.4% for the 
fiscal year ended 1998 over the prior period. In fiscal 1998, the Company 
opened 17 company-owned stores, purchased 10 franchise stores, and closed 3 
stores. Stores were closed when leases expired, or the store was relocated 
to a larger space.

         The number of franchise stores decreased to 46 stores at the end of 
fiscal 1998 from 51 franchise stores at the end of fiscal 1997. Nine new 
franchise stores were opened, ten franchise stores were sold, two franchise 
stores were closed and two franchise stores were terminated. Franchise 
revenue increased 9.5% to $1.3 million for fiscal 1998 from $1.2 million for 
fiscal 1997. Initial franchise fees increased 84.5% or $60,000 due to an 
increase in the number of franchise store openings in fiscal 1998. The 
increase in initial franchise fees was augmented by increased royalty 
payments resulting from increased sales in the franchise stores. Royalty 
payments averaged 4% of sales in the franchise stores.

         COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and 
occupancy costs for fiscal 1998 were $41.3 million or 66.3% of Company-owned 
store revenue, as compared to $35.0 million or 67.5% of Company-owned store 
revenue for fiscal 1997. Cost of products sold and occupancy costs reflects 
the direct cost of merchandise and store occupancy costs, including rent, 
common area maintenance costs, and real estate taxes. The decrease as a 
percentage of Company-owned store revenue is primarily related to one-time 
events that decreased the cost of product.

         STORE OPERATING EXPENSES. Store operating expenses for fiscal 1998 
were $15.2 million or 24.4% of Company-owned store revenue, as compared to 
$11.5 million or 22.2% of Company-owned store revenue in fiscal 1997. The 
increased percentage was primarily attributable to increases in store labor, 
and secondarily to increased store operating expenses. The largest increase 
was in payroll and related benefits. The average hourly wage rates continue 
to increase due to tight labor markets.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative 
expenses were $7.6 million or 12.0% of total revenue in fiscal 1998 compared 
to $5.5 million or 10.4% of total revenue in fiscal 1997. The increase in 
general and administrative expenses is primarily attributable to increases in 
necessary infrastructure and additional staff to support the growing 
Company-owned store base. Amortization expense of goodwill increased due to 
the Company's purchases of franchise stores.

         INTEREST EXPENSE. Interest expense, net of interest income, 
decreased $543,000 to $254,000, or .4% of total revenues in fiscal 1998 from 
$798,000 or 1.5% of total revenues, in fiscal 1997. The Company used the net 
proceeds of its initial public offering to repay certain bank debt, 
subordinated debt, and shareholder notes, and to fund new store growth. The 
Company did not borrow under its bank revolving line of credit until late in 
the second quarter of fiscal 1998.

         NET LOSS. As a result of the factors discussed above, the Company 
had a net loss of $521,000 in fiscal 1998. This compares to a pro forma net 
loss of $207,000 in fiscal 1997.

                                       -21-
<PAGE>

FISCAL YEAR ENDED JANUARY 30, 1998 (52 WEEKS) COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997 (52 WEEKS)

         REVENUE. Company-owned store revenue increased 23.6% to $51.8 
million for fiscal 1997 from $41.9 million for fiscal 1996. This increase was 
partially attributable to an increase in the number of Company-owned stores 
from 64 stores at the end of fiscal 1996 to 73 stores at the end of fiscal 
1997. Approximately $3.0 million of the increase in revenues was attributable 
to comparable store sales increases and approximately $6.9 million was 
attributable to new and remodeled Company-owned stores. Comparable store 
sales increased 8.3% for the fiscal year ended 1997 over the prior period.

         The number of franchise stores increased to 51 at the end of fiscal 
1997 from 50 franchise stores at the end of fiscal 1996. Franchise revenue 
increased 4.6% to $1.2 million for fiscal 1997 from $1.1 million for fiscal 
1996. Initial franchise fees decreased 57.0% or $94,000 due to a reduction in 
the number franchise store openings in fiscal 1997. The decrease in initial 
franchise fees was offset by increased royalty payments resulting from 
increased sales in the franchise stores. Royalty payments averaged 4% of 
sales in the franchise stores.

         COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and 
occupancy costs for fiscal 1997 was $35.0 million or 67.5% of Company-owned 
store revenue, as compared to $27.9 million or 66.7% of Company-owned store 
revenue for fiscal 1996. Cost of products sold and occupancy costs reflects 
the direct cost of merchandise and store occupancy costs, including rent, 
common area maintenance costs, and real estate taxes. The increase as a 
percentage of Company-owned store revenue is primarily related to increases 
in occupancy costs, particularly increases in real estate taxes and common 
area maintenance charges.

         STORE OPERATING EXPENSES. Store operating expenses for fiscal 1997 
were $11.5 million or 22.2% of Company-owned store revenue, as compared to 
$8.7 million or 20.8% of Company-owned store revenue in fiscal 1996. The 
increase as a percentage of Company-owned store revenue was primarily 
attributable to increases in store labor, advertising, and credit card fees. 
The largest increase was in payroll and related benefits, resulting from an 
increase in the federal minimum wage in third quarter and a tight labor 
market, especially in third and fourth quarter, which caused hourly labor 
rates to increase. Advertising increased during the important Halloween and 
Christmas selling seasons. A new poster flyer concept was introduced for 
Halloween. Credit card fees also increased as a result of a change in Company 
strategy in late fiscal 1996 to begin accepting credit cards. The roll out of 
credit card acceptance was completed in mid-1997.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative 
expenses were $5.5 million or 10.4% of total revenue in fiscal 1997 compared 
to $4.2 million or 9.9% in fiscal 1996. The increase in general and 
administrative expenses is primarily attributable to necessary infrastructure 
and additional staff to support the growing Company-owned store base. 
Additionally, in fiscal 1997, the Company increased its senior management 
team with key additions.

         INTEREST EXPENSE. Interest expense, net of interest income, 
increased $26,000 to $798,000, or l.5% of total revenues in fiscal 1997 from 
$772,000 or 1.8% of total revenues, in fiscal 1996. The Company used the net 
proceeds of its initial public offering to repay certain bank debt, 
subordinated debt, and shareholder notes, resulting in the Company changing 
to a "net investor" rather than a "net borrower" at fiscal year end.

         EXTRAORDINARY CHARGE AND EXPENSES OF CANCELED ACQUISITION. As a 
result of the early retirement of the Subordinated Notes in connection with 
the Company's initial public offering, the Company incurred a one-time charge 
to earnings, in the fourth quarter, of approximately $183,000 for the 
unamortized portion of the Company's expenses related to issuance of the 
Subordinated Notes. 

                                       -22-
<PAGE>

Additionally, the Company took a fourth quarter charge of $261,000 related to 
the expenses associated with the proposed acquisition of The Paper Factory of 
Wisconsin, Inc. by Paper Warehouse, which was terminated January 26, 1998.

         PRO FORMA NET (LOSS) INCOME. As a result of the factors discussed 
above, the Company realized a pro forma net loss of $207,000 in fiscal 1997 
as compared to pro forma net income of $808,000 for fiscal 1996. Pro forma 
net (loss) income includes a benefit (provision) for federal and state income 
taxes.

SEASONALITY

         The Company's results of operations have historically fluctuated 
from quarter to quarter for such reasons as seasonal variations in revenues 
and operating expenses, the amount and timing of revenues contributed by new 
Company-owned and franchise stores, the costs associated with the opening of 
new stores, and expenses incurred to support the Company's expansion 
strategy. As a result of these seasonal variations, a significant portion of 
the Company's operating income is generated in the second and fourth fiscal 
quarters. Historically, the Company has engaged in more promotional activity 
during the third quarter than the second quarter, which results in reduced 
operating income for the third quarter as compared to the second quarter. Any 
factors negatively affecting the Company during the second and fourth fiscal 
quarters could have a material adverse effect on the Company's financial 
condition and results of operations for the entire fiscal year. Further, as a 
result of the seasonality of the Company's revenue, the Company expects to 
incur a loss in the first quarter of each year for the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary capital requirements are for ongoing 
operations, principally inventory, and capital improvements to support the 
opening of new Company-owned stores and the remodeling of existing 
Company-owned stores. The Company's primary sources of liquidity have been 
met by cash from operations, payment terms from vendors, borrowings under its 
revolving line of credit, the Subordinated Notes and proceeds from the 
Company's initial public offering.

         For fiscal 1998 and fiscal 1997, the Company's working capital was 
$5.2 million and $9.4 million, respectively. Cash (used for) provided by 
operations for each of the last three fiscal years was approximately ($2.2 
million), $746,000, and $85,000, respectively. The decrease in cash flows 
from operations in fiscal 1998 compared to fiscal 1997 was primarily 
attributable to an increase in merchandise inventories to support new and 
existing Company-owned stores.

         For fiscal 1998 and fiscal 1997, the Company's accounts payable were 
$4.4 million and $3.0 million, respectively. The increase in accounts payable 
was primarily attributable to increased merchandise inventory.

         Net cash used for investing activities for fiscal 1998, 1997 and 
1996, was approximately $6.7 million, $2.5 million, and $1.2 million, 
respectively. These expenditures were primarily related to opening and 
remodeling existing Company-owned stores and upgrading the Company's 
information systems.

         For fiscal 1998, the Company had capital expenditures of 
approximately $4.3 million, including approximately $3.2 million related to 
new stores. The Company currently plans to open fewer than ten Company-owned 
stores in fiscal 1999. Total capital expenditures in fiscal 1999 are 
estimated to be $2.7 million. These capital expenditures will be for new 
store openings, fixturing and remodeling existing stores, and information 
systems. The Company intends to continue to finance all of its new store
fixtures and equipment with long-term capital leases, assuming availability and
reasonable terms.

                                       -23-
<PAGE>

         Net cash provided by financing activities for fiscal 1998, 1997 and 
1996, was $6.9 million $3.5 million, and $585,000, respectively. Cash 
provided by financing activities in fiscal 1998 reflects the Company's 
borrowing under its revolving line of credit with its banks. Cash provided by 
financing activities in fiscal 1997 was primarily from the Company's initial 
public offering.

         In January 1997, the Company entered into a $7.5 million revolving 
credit facility. The credit facility accrues interest at the bank's base rate 
plus 0.5% and expires on May 31, 1999. The Company is currently in 
negotiation to extend the maturity of this revolving credit facility. The 
credit facility is secured by substantially all the assets of the Company. 
The Company is required to maintain certain customary covenants. Advances 
under the revolving line of credit bear interest at the bank's prime rate 
(7.75% at January 29, 1999) plus .50% and are collateralized by all assets of 
the Company, except those assets which are leased, and not including the 
Company's corporate office. The credit facility contains various covenants 
including, among others, the maintenance of certain debt to net worth and 
current ratios, and minimum net income and net worth. At January 29, 1999, 
the Company was in compliance with all the covenants under its credit 
facility and there was $6.8 million borrowings outstanding. The credit facility
also prohibits the Company from paying dividends except for distributions in 
connection with the termination of its S Corporation status. The initial 
borrowings of this facility were used to retire in full the outstanding 
balance under the Company's previous credit facility.

         The Company anticipates opening fewer than ten Company-owned stores 
during fiscal 1999. In addition, the Company may seek to acquire existing 
stores from franchisees. At present, the Company has no agreement to acquire 
any franchise store. The Company expects that the average new store cost for 
Company-owned stores will be approximately $186,000. These expenditures 
include approximately $131,000 for fixtures and equipment, including 
point-of-sale equipment, and $55,000 for store inventory, net of accounts 
payable. Pre-opening expenses are expensed as incurred. The Company typically 
leases approximately 8,500 square feet for its Company-owned stores and seeks 
to lease sites rather than own real estate.

         Out of its planned Company-owned stores to be opened in fiscal 1999, 
as of March 31, 1999, the Company has signed leases for five locations. Most 
of the leases are for 10-year terms, with 5-year renewal options.

         The Company believes that the combination of cash flow from 
operations and available borrowing capacity under a revolving credit 
facility, will be adequate to handle its cash requirements through fiscal 
1999, including the cash needed to open new stores. The Company's current 
revolving line of credit expires May 31, 1999. The Company has typically 
renegotiated its revolving line of credit in the spring as it is doing this 
year. The Company also anticipates that additional cash will be needed in the 
ordinary course of business to support its growth, and is currently 
negotiating with a prospective lender to replace its existing revolving 
credit facility. The Company expects consummation of the replacement 
revolving line of credit by the time the current revolving line of credit 
expires. Failure of the Company to extend its current revolving credit 
facility and to secure replacement financing could have a material adverse 
effect on the Company.

INFLATION

         The Company believes that inflation has not had a material impact 
upon its historical operating results, and does not expect it to have such an 
impact in the future. There can be no assurance that the Company's business 
will not be affected by inflation in the future.

                                       -24-
<PAGE>

IMPACT OF YEAR 2000

         The Year 2000 problem arose because many existing computer programs 
use only the last two digits to refer to a year. Therefore, these computer 
programs do not properly recognize a year that begins with "20", instead of 
the current "19." If not corrected, many computer applications could fail or 
create erroneous results. The extent of the potential impact of the Year 2000 
problem is not yet known, and if not timely corrected, could affect the 
global economy. It is possible that the Company's currently installed 
computer systems, software, or other business systems, or those of the 
Company's suppliers, will not accept input of, store, or manipulate output 
dates for the years 2000 and beyond without error or manipulation.

         STATE OF READINESS: Management of the Company is actively engaged in 
the process of evaluating the status of the Company's internal Information 
Technology ("IT") and non-IT systems for compliance with Year 2000 issues. In 
addition, the Company is in the process of verifying that third parties with 
whom the Company has a material relationship, such as its largest vendors and 
suppliers, are Year 2000 compliant. The majority of the Company's exposure is 
in the readiness of third parties, where the situation is much less within 
the Company's ability to predict or control. The first phase, evaluating the 
Company's internal systems, is substantially complete. The second phase, 
evaluating third party systems, was commenced in the second quarter of fiscal
1998, and is expected to be substantially complete by mid-fiscal 1999. In 
addition, while the Company values its established relationships with its key 
vendors, it is identifying secondary vendors in the event that certain of its 
business partners are delayed in achieving Year 2000 compliance. The 
Company's progress with regard to achieving Year 2000 compliance is monitored 
and reported on a regular basis to its management and Board of Directors.

         Non-IT systems. Management believes that the failure of any internal 
non-IT systems, e.g. alarms, telephone system, voicemail, access cards, 
locks, heating and cooling systems, etc., to be compliant for the Year 2000 
would have little effect on the business, operations, or financial condition 
of the Company as a whole. Management continues to review its non-IT systems, 
and will continue to take steps to modify, upgrade or replace non-IT systems 
as necessary to be Year 2000 compliant. The anticipated expenses for such 
replacement/conversions are not expected to be material. Management believes 
that any additional modifications/replacements will not have a material 
impact on its business, operations, or financial condition.

         Major IT Systems. During 1998 and 1997, the Company upgraded or 
replaced its mission critical data processing system which controls the 
Company's financial records, inventory management, and purchasing, and 
believes that these systems will function properly with respect to dates in 
the Year 2000 and beyond. The Company has received certification from many of 
its hardware and software suppliers of the upgraded or replaced systems that 
the systems should function correctly in Year 2000 and beyond. The Company is 
in the process of upgrading its cash registers and personal computers as 
necessary, in order to achieve Year 2000 compliance. All registers that are 
not Year 2000 compliant will be upgraded by the Year 2000. Management 
believes that any additional modifications/replacements will not have a 
material impact on its business, operations, or financial condition.

         Third Party Systems. The Company has been in contact with its major 
suppliers and service providers to understand their state of Year 2000 
readiness, asked its major suppliers and service providers to complete a 
survey on their state of Year 2000 readiness, and is assessing the possible 
effects an adverse impact could have on the Company. The failure by a vendor 
or supplier to be Year 2000 compliant may interrupt the flow of products to 
the Company's stores for sale. Depending on how long product supply to the 
stores is interrupted, the impact could have a material adverse effect. 
Multiple sources of product supply mitigate this concern. The Company may 
experience some inconvenience if one or more of its infrastructure (utility) 
providers are not Year 2000 compliant. If the utility providers are not able 
to provide electricity, water, heat, etc., to a store or stores following 
January 1, 2000, the 

                                       -25-
<PAGE>

Company will, nonetheless, attempt to open all stores. If an infrastructure 
failure would continue for more than several days, the result could have a 
material adverse effect on the Company's revenues, earnings, and cash flow.

         COSTS TO ADDRESS YEAR 2000 Issues. To date, the cost associated with 
Year 2000 readiness has been immaterial. Management expects that any 
additional costs of being Year 2000 compliant will be immaterial.

         RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. Some risks associated 
with the Year 2000 problem are beyond the ability of the Company to control, 
including the extent to which the Company's suppliers and service providers 
can address the Year 2000 problem. Therefore, the Company cannot estimate the 
impact to the Company if third parties are not Year 2000 compliant. The 
failure by a third party vendor or supplier to adequately address the Year 
2000 issue could have a material adverse affect on the third party, and 
therefore could have an adverse affect on the Company. The most likely worst 
case Year 2000 scenario is that one or more of the Company's stores will not 
have power, heat, or water. The stores affected could still open for business 
using a cash box to make sales and flashlights to provide light.

         CONTINGENCY PLANS. The Company has not developed a formal 
contingency plan for the Year 2000 problem for its operations. If the need 
arises, the Company will create a contingency plan.

         The costs of the Company's Year 2000 compliance programs and the 
timetable on which the Company plans to complete such programs are based on 
management's best estimates, and reflect assumptions regarding the 
availability and cost of personnel trained in this area, the compliance plans 
of third parties and similar uncertainties. However, due to the complexity 
and pervasiveness of the year 2000 issue, and in particular the uncertainty 
regarding the compliance programs of third parties, no assurance can be given 
that these estimates will be achieved, and actual results could differ 
materially from those anticipated.

RECENT DEVELOPMENTS

         On April 8, 1999, the Company refinanced its corporate office 
building. The $1.1 million term note is payable in monthly installments of 
$8,612, including interest at 7.125%, through May 2009. The note is secured 
by a first mortgage on the Company's office headquarters.

USE OF INITIAL PUBLIC OFFERING PROCEEDS

         The Company completed an initial public offering of shares of its 
Common Stock on November 28, 1997. The total offering was for 1,778,000 
shares of Common Stock, all of which were offered and sold by the Company. On 
December 24, 1997, the underwriters partially exercised their over-allotment 
option, purchasing 207,800 shares of Common Stock from the Company. The 
offering price of the 1,985,800 shares of Common Stock (including the 
over-allotment) was $7.50 per share. The proceeds to the Company, after 
deduction of the underwriting discount and expenses associated with the 
Offering, were $13.1 million.

         Through January 29, 1999, the aggregate amount of expenses incurred 
by the Company in connection with the issuance and distribution of the shares 
of Common Stock offered and sold in the initial public offering, including 
the underwriter's over-allotment, was approximately $1.7 million. This 
includes underwriting discounts and commissions (of approximately $1.0 
million) and expenses paid for accounting, legal, printing, and other 
expenses.

         During the period from November 28, 1997, through January 29, 1999, 
the net proceeds of the offering have been applied as follows: (i) to repay 
borrowings outstanding under the Company's 

                                       -26-
<PAGE>

revolving credit facility in the amount of $5.8 million, (ii) to prepay the 
10% Subordinated Notes due November 30, 2004 in the amount of $2.1 million, 
and (iii) to repay shareholder notes in the aggregate amount of $2.1 million
to Yale T. Dolginow and Brent D. Schlosser. The remaining $3.1 million has 
been used for other general corporate purposes.

PRIVATE SECURITIES LITIGATION REFORM ACT

         The Private Securities Litigation Reform Act of 1995 provides a 
"safe harbor" for forward-looking statements. Certain information included 
herein and other materials filed or to be filed by the Company with the 
Securities and Exchange Commission (as well as information included in oral 
statements or other written statements made or to be made by the Company) 
contain statements that are forward-looking, such as plans for future 
expansion and other business development activities as well as other capital 
spending, financing sources, and competition.

         Such forward-looking information involves important risks and 
uncertainties that could significantly affect anticipated results in the 
future and, accordingly, such results may differ from those expressed in any 
forward-looking statements made by or on behalf of the Company. These risks 
and uncertainties include, but are not limited to, those relating to 
development and construction activities, dependence on existing management, 
general economic conditions, and changes in federal or state laws or the 
administration of such laws.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS.

         The following Consolidated Financial Statements of the Company and 
the Independent Auditors' Report included on pages F-1 to F-16 of this Form 
10-K are incorporated herein by reference.

<TABLE>
<CAPTION>
                                                                        Page(s)
<S>                                                                     <C>
Independent Auditors' Report..........................................      F-1
Financial Statements:
       Consolidated Balance Sheets....................................      F-2
       Consolidated Statements of Operations..........................      F-3
       Consolidated Statements of Stockholders' Equity................      F-4
       Consolidated Statements of Cash Flows..........................      F-5
Notes to Consolidated Financial Statements............................ F-6 - 16
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE.

         None.

                                       -27-
<PAGE>

                  PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information under the captions "Election of 
Directors--Information About Nominees" and "Election of Directors--Other 
Information About Nominees" in the Company's 1999 Proxy Statement is 
incorporated herein by reference.

         The information under the caption "Section 16(a) Beneficial 
Ownership Reporting Compliance" in the Company's 1999 Proxy Statement is 
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

         The information under the captions "Election of 
Directors--Compensation of Directors" and "Executive Compensation and Other 
Benefits" in the Company's 1999 Proxy Statement is incorporated herein by 
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  information  under the caption "Principal Shareholders and 
Beneficial Ownership of Management" in the Company's 1999 Proxy Statement is 
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information under the caption "Certain Relationships and Related 
Transactions" in the Company's 1999 Proxy Statement is incorporated herein by 
reference.


                                       -28-
<PAGE>

                  PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  DOCUMENTS FILED AS PART OF FORM 10-K REPORT

(1)      Financial Statements:

                      Paper Warehouse, Inc. and Subsidiary
                        Consolidated Financial Statements
                      January 29, 1999 and January 30, 1998

Paper Warehouse, Inc. and Subsidiary
Table of Contents

<TABLE>
<CAPTION>
                                                                     Page(s)
<S>                                                                  <C>
Independent Auditors' Report.......................................    F-1
Financial Statements:
     Consolidated Balance Sheets...................................    F-2
     Consolidated Statements of Operations.........................    F-3
     Consolidated Statements of Stockholders' Equity...............    F-4
     Consolidated Statements of Cash Flows.........................    F-5
Notes to Consolidated Financial Statements.........................   F-6-16

</TABLE>


                                       -29-
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Paper Warehouse, Inc. and Subsidiary:

         We have audited the accompanying consolidated balance sheets of 
Paper Warehouse, Inc. and Subsidiary (the Company) as of January 29, 1999 and 
January 30, 1998, and the related consolidated statements of operations, 
stockholders' equity, and cash flows for each of the years in the three-year 
period ended January 29, 1999. These consolidated financial statements are 
the responsibility of the Company's management. Our responsibility is to 
express an opinion on these consolidated financial statements based on our 
audits.

         We conducted our audits in accordance with generally accepted 
auditing standards. Those standards require that we plan and perform the 
audit to obtain reasonable assurance about whether the consolidated financial 
statements are free of material misstatement. An audit includes examining, on 
a test basis, evidence supporting the amounts and disclosures in the 
consolidated financial statements. An audit also includes assessing the 
accounting principles used and significant estimates made by management, as 
well as evaluating the overall financial statement presentation. We believe 
that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to 
above present fairly, in all material respects, the financial position of 
Paper Warehouse, Inc. and Subsidiary as of January 29, 1999 and January 30, 
1998, and the results of their operations and their cash flows for each of 
the years in the three-year period ended January 29, 1999, in conformity with 
generally accepted accounting principles.

                                                  /s/ KPMG Peat Marwick LLP

March 19,1999
Minneapolis, Minnesota

                                      F-1
<PAGE>

                      PAPER WAREHOUSE, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                      JANUARY 29, 1999 AND JANUARY 30, 1998

<TABLE>
<CAPTION>
                                                                                        January 29,       January 30,
                                                                                           1999              1998
                                                                                           ----              ----
<S>                                                                                     <C>               <C>
ASSETS

Current assets:
   Cash and cash equivalents................................................            $    64,507       $ 2,059,737
   Inventories, net.........................................................             16,302,070        11,161,549
   Accounts receivable......................................................              1,105,262           451,937
   Prepaid expenses and other current assets................................                613,584           153,968
                                                                                        -----------       -----------
         Total current assets...............................................             18,085,423        13,827,191

   Property and equipment, net..............................................              9,976,450         6,798,228
   Other assets, net........................................................              1,466,613           391,918
                                                                                        -----------       -----------
         Total assets.......................................................            $29,528,486       $21,017,337
                                                                                        -----------       -----------
                                                                                        -----------       -----------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Notes payable - line of credit...........................................            $ 6,850,000       $       ---
   Current maturities of long-term debt.....................................                151,993           305,585
   Current maturities of capital lease obligation...........................                308,566           179,671
   Accounts payable.........................................................              4,390,525         2,989,016
   Accrued liabilities:
         Payroll and related expenses.......................................                563,112           369,486
         Accrued expenses...................................................                337,014           349,718
         Accrued interest...................................................                 15,037            10,317
         Other..............................................................                256,893           240,765
                                                                                        -----------       -----------
         Total current liabilities..........................................             12,873,140         4,444,558

Capital lease obligation, less current maturities...........................                635,204           355,927
Long-term debt, less current maturities.....................................                861,827           911,409
Deferred rent credits and other.............................................              1,068,331           711,659
                                                                                        -----------       -----------
         Total liabilities..................................................             15,438,502         6,423,553

Stockholders' equity:
  Serial preferred stock, 10,000,000 shares authorized;
      none issued or outstanding............................................                    ---               ---
  Common stock, $.01 par value;  40,000,000 shares authorized;
  4,627,936 and 4,557,187 shares issued and outstanding, respectively.......                 46,279            45,572
  Additional paid-in capital................................................             13,833,442        13,683,807
  Retained earnings.........................................................                210,263           864,405
                                                                                        -----------       -----------
         Total stockholders' equity.........................................             14,089,984        14,593,784

         Total liabilities and stockholders' equity.........................            $29,528,486       $21,017,337
                                                                                        -----------       -----------
                                                                                        -----------       -----------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>

                      PAPER WAREHOUSE, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
       YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997

<TABLE>
<CAPTION>
                                                                       January 29,      January 30,       January 31,
                                                                          1999              1998              1997
                                                                          ----              ----              ----
<S>                                                                    <C>              <C>               <C>
Revenues:
  Company-owned stores....................................             $62,218,553      $51,787,842       $41,892,173
  Franchise related fees..................................               1,271,973        1,161,097         1,109,737
                                                                       -----------      -----------       -----------
         Total revenues...................................              63,490,526       52,948,939        43,001,910

Costs and expenses:
  Costs of products sold and occupancy costs..............              41,252,342       34,966,018        27,946,561
  Store operating expenses................................              15,185,082       11,484,271         8,732,589
  General and administrative expenses.....................               7,643,011        5,515,491         4,242,960
                                                                       -----------      -----------       -----------
         Total costs and expenses.........................              64,080,435       51,965,780        40,922,110

         Operating (loss) income..........................                (589,909)         983,159         2,079,800

  Interest expense, net...................................                 254,405          797,567           771,549
  Expenses of canceled acquisition........................                     ---          260,852               ---
                                                                       -----------      -----------       -----------
  (Loss) income before income taxes and
      extraordinary charge................................                (844,314)         (75,260)        1,308,251

  Income tax benefit (expense)............................                 323,654           (5,941)           (5,300)
                                                                       -----------      -----------       -----------
  (Loss) income before extraordinary charge...............                (520,660)         (81,201)        1,302,951
                                                                       -----------      -----------       -----------
  Extraordinary charge for extinguishment of debt ........                     ---         (182,611)              ---

  Tax benefit of extraordinary charge.....................                     ---           72,846               ---
                                                                       -----------      -----------       -----------
  Extraordinary charge, net...............................                     ---         (109,765)              ---
                                                                       -----------      -----------       -----------
         Net (loss) income................................             $  (520,660)     $  (190,966)      $ 1,302,951
                                                                       -----------      -----------       -----------
                                                                       -----------      -----------       -----------
Basic and diluted earnings per share:
    Weighted average shares outstanding....................              4,572,979
    Net loss per share.....................................            $     (0.11)
                                                                       -----------    
Pro forma net (loss) income...............................                              $  (206,610)      $   807,830
Pro forma basic earnings per share:
    Weighted average shares outstanding....................                               2,630,811         2,202,818
    (Loss) income before extraordinary charge per share....                             $     (0.04)      $      0.37
    Extraordinary charge per share.........................                                   (0.04)              ---
                                                                                        -----------       -----------
    Net (loss) income per share............................                             $     (0.08)      $      0.37
                                                                                        -----------       -----------
                                                                                        -----------       -----------
Pro forma diluted earnings per share:
    Weighted average shares outstanding....................                               2,630,811         2,514,250
    (Loss) income before extraordinary charge per share....                             $     (0.04)      $      0.32
    Extraordinary charge per share.........................                                   (0.04)              ---
                                                                                        -----------       -----------
    Net (loss) income per share............................                             $     (0.08)      $      0.32
                                                                                        -----------       -----------
                                                                                        -----------       -----------
</TABLE>

    See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                      PAPER WAREHOUSE, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
       YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997

<TABLE>
<CAPTION>
                                                         Number of                       Additional                      Total
                                        Preferred         Common           Common         Paid-in       Retained      Stockholders'
                                          Stock           Shares           Stock          Capital       Earnings         Equity
                                          -----           ------           -----          -------       --------         ------
<S>                                     <C>              <C>              <C>          <C>           <C>              <C>        
Balance, February 2, 1996..............    ---           2,202,818         $22,028     $   572,472   $  2,529,075      $ 3,123,575

  Net income...........................    ---                 ---             ---             ---      1,302,951        1,302,951
  Distribution of earnings.............    ---                 ---             ---             ---    (2,633,992)       (2,633,992)
                                        ---------        ---------         -------     -----------   ------------      -----------
Balance, January 31, 1997..............    ---           2,202,818          22,028         572,472      1,198,034        1,792,534

  Net loss.............................    ---                 ---             ---             ---       (190,966)        (190,966)
  Distribution of earnings.............    ---                 ---             ---             ---       (142,663)        (142,663)
  Exercise of event option.............    ---             197,219           1,972          (1,972)           ---              ---
  Conversion of warrants...............    ---             171,350           1,714          (1,714)           ---              ---
  Issuance of common stock
      pursuant to public offering......    ---           1,985,800          19,858      13,115,021            ---       13,134,879
                                        ---------        ---------         -------     -----------   ------------      -----------
Balance, January 30, 1998..............    ---           4,557,187          45,572      13,683,807        864,405       14,593,784

  Net loss.............................    ---                 ---             ---             ---       (520,660)        (520,660)
  Distribution of earnings.............    ---                 ---             ---             ---       (133,482)        (133,482)
  Issuance of common stock (See
      Note 8)..........................    ---              70,749             707         149,635            ---          150,342
                                        ---------        ---------         -------     -----------   ------------      -----------
Balance, January 29, 1999..............    ---           4,627,936         $46,279     $13,833,442   $    210,263       $14,089,984
                                        ---------        ---------         -------     -----------   ------------      -----------
                                        ---------        ---------         -------     -----------   ------------      -----------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                      PAPER WAREHOUSE, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
      YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997

<TABLE>
<CAPTION>
                                                                         January 29,      January 30,       January 31,
                                                                            1999             1998              1997
                                                                            ----             ----              ----
<S>                                                                     <C>              <C>               <C>
CASH FLOWS FROM OPERATIONS:
Net (loss) income...............................................        $  (520,660)     $  (190,966)      $  1,302,951
Adjustments to reconcile net (loss) income to net cash
  (used for) provided by operations:
     Write-off of subordinated debt fees........................                ---          182,611               ---
     Depreciation and amortization..............................          1,732,220        1,140,966           959,901
     Gain on sale of property and equipment.....................               (277)          (1,892)           (4,375)
     Deferred taxes.............................................           (323,654)             902               ---
Changes in operating assets and liabilities, net of the effect
  of the purchase of the assets of a business:
     Accounts receivable........................................           (653,325)        (190,513)          217,740
     Prepaid expenses and other current assets..................           (459,616)         (34,915)           13,259
     Merchandise inventories, net...............................         (3,966,362)      (1,592,869)       (1,851,922)
     Accounts payable...........................................          1,401,509          866,731          (488,220)
     Accrued liabilities........................................            558,442          566,365           (63,896)
                                                                        -----------      -----------       -----------
       Net cash (used for) provided by operations...............         (2,231,723)         746,420            85,438
                                                                        -----------      -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets of a business................................         (2,239,165)             ---               ---
Proceeds from sale of property and equipment....................              6,349            7,807           136,960
Purchases of property and equipment.............................         (4,334,787)      (2,438,110)       (1,317,283)
Other assets, net of effect of asset acquisition................           (117,420)        (118,390)          (18,544)
                                                                        -----------      -----------       -----------
       Net cash used for investing activities...................         (6,685,023)      (2,548,693)       (1,198,867)
                                                                        -----------      -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net......................                ---       13,134,879               ---
(Payments on) net proceeds from related party loans.............                ---       (2,136,193)        2,136,193
Net proceeds from note payable - other..........................                ---           55,353               ---
Net proceeds from (payments on) notes payable to bank...........          6,850,000       (5,870,000)        1,106,061
Principal payments on long-term debt............................           (203,174)      (2,072,131)          (23,106)
Net proceeds from capital leases................................            408,172          535,598               ---
Distribution of earnings........................................           (133,482)        (142,663)       (2,633,992)
                                                                        -----------      -----------       -----------
       Net cash provided by financing activities................          6,921,516        3,504,843           585,156
                                                                        -----------      -----------       -----------
       Net (decrease) increase in cash and cash equivalents.....         (1,995,230)       1,702,570          (528,273)

Cash and cash equivalents, beginning of year....................          2,059,737          357,167           885,440
Cash and cash equivalents, end of year..........................        $    64,507      $ 2,059,737       $   357,167
                                                                        -----------      -----------       -----------
                                                                        -----------      -----------       -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
         Interest...............................................        $   274,004      $   846,538         $ 877,410
         Income taxes...........................................                ---            5,039             5,300
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>



                      PAPER WAREHOUSE, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      JANUARY 29, 1999 AND JANUARY 30, 1998

(1)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        (a)      DESCRIPTION OF BUSINESS

         Paper Warehouse, Inc. (the Company) is a paper and party goods 
retailer operating 97 stores in the states of Arizona, Colorado, Iowa, 
Kansas, Minnesota, Missouri, Nebraska, Oklahoma, Washington and Wisconsin. 
The Company also sells Paper Warehouse franchises through a wholly-owned 
subsidiary. In exchange for the initial and continuing franchise fees 
received, the Company provides management assistance and gives franchisees 
the right to use the name "Paper Warehouse" or "Party Universe."

         (b)     BASIS OF PRESENTATION

         Effective February 1, 1997, the Company acquired Paper Warehouse 
Franchising, Inc., a company under common control. The acquisition has been 
accounted for on an "as if pooled" basis and, accordingly, the accompanying 
financial statements include the financial condition and results of 
operations of both companies for all periods presented. Intercompany 
transactions have been eliminated in consolidation.

         (c)     ACCOUNTING ESTIMATES

         The preparation of consolidated financial statements in conformity 
with generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amounts of assets and 
liabilities and disclosure of contingent assets and liabilities at the date 
of the financial statements and the reported amounts of revenues and expenses 
during the reporting period. Actual results could differ from those estimates.

         (d)     FAIR VALUES OF FINANCIAL INSTRUMENTS

         Due to their short-term nature, the carrying value of the Company's 
financial assets and liabilities approximates their fair value. The fair 
value of the Company's borrowings, if recalculated based on current interest 
rates, would not significantly differ from the recorded amounts.

         (e)     S-CORPORATION ELECTION

         Prior to its initial public offering in November 1997, the Company 
had elected to be taxed as an S-Corporation under the Internal Revenue Code. 
The Company had agreed to make distributions of earnings in amounts 
sufficient to enable stockholders to pay their federal and state income taxes 
resulting from pass-through of taxable income as a result of the 
S-Corporation election.

         (f)     FISCAL YEAR

         The Company's fiscal year ends on the Friday closest to January 
31st. The fiscal years ended January 29, 1999, January 30, 1998, and January 
31, 1997 included 52 weeks. Unless otherwise stated, references to years in 
this report relate to fiscal years rather than to calendar years.

                                     F-6
<PAGE>

         (g)     MERCHANDISE INVENTORIES

         Inventories, are stated at the lower of cost (as determined on a 
first-in, first-out basis) or market. The Company reviews slow moving 
merchandise and takes appropriate markdowns to move the inventory. 
Periodically the Company reviews inventory valuations and takes appropriate 
write-downs, as it deems necessary.

         (h)     CASH EQUIVALENTS

         Cash equivalents of $4,641 at January 29, 1999, consist of 
short-term investment in money market accounts with funds available at any 
time. For purposes of the Consolidated Statements of Cash Flows, the Company 
considers all highly liquid instruments with maturities of three months or 
less to be cash equivalents.

         (i)     PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost. Depreciation is 
computed by the method indicated over the estimated useful lives of the 
assets as follows:

<TABLE>
<CAPTION>
                                                                                                         Estimated
                                                                                Method                  useful lives
                                                                                ------                  ------------
<S>                                                                         <C>                        <C>
         Computers..........................................                Straight - line            3 years
         Fixtures and equipment.............................                Straight - line            5 to 7 years
         Building...........................................                Straight - line            40 years
         Land improvements..................................                Straight - line            40 years
</TABLE>

         Maintenance, repairs, and minor renewals are expensed as incurred. 
Upon retirement or disposal of assets, the cost and accumulated depreciation 
are eliminated from the respective accounts and the related gains or losses 
are credited or charged to income.

         (j)     INTANGIBLE ASSETS

         The excess of cost over fair value of net assets resulting from the 
acquisition of a store created goodwill that is being amortized over 15 years 
using the straight-line method.

         The costs of acquiring trademarks have been capitalized and are 
being amortized on a straight-line basis over 10 years.

         (k)     OTHER ASSETS

         Other assets consist primarily of security deposits and lease 
acquisition fees. Lease acquisition fees are amortized over the related lease 
term using the straight-line method.

                                      F-7
<PAGE>

         (l)     DEFERRED RENT CREDITS

         Certain of the Company's operating leases provide for scheduled 
increases in base rentals over their terms. For these leases, the Company 
recognizes the total rental amounts due over the lease terms on a 
straight-line basis and, accordingly, has established corresponding deferred 
rent credits for the differences between the amounts recognized and the 
amounts paid.

         (m)     PRE-OPENING COSTS

         Costs associated with the opening of new stores are expensed as 
incurred.

         (n)     STOCK-BASED COMPENSATION

         Compensation expense for stock option grants is recognized in 
accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for 
Stock Issued to Employees".  Had Statement of Financial Accounting Standards 
(SFAS) No. 123, "Accounting for Stock-based Compensation", been applied, the 
Company's compensation expense would have been different; see Note 9.

         (o)     ADVERTISING

         The Company expenses the cost of advertising as incurred or the 
first time the advertisement takes place.

         (p)      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In April 1998, the Accounting Standards Executive Committee (AcSEC) 
issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of 
Start-Up Activities". This SOP provides guidance on the financial reporting 
of start-up costs and organization costs and requires that these costs be 
expensed as incurred. This SOP is effective for fiscal years beginning after 
December 15, 1998. The Company has not yet determined the impact that 
adoption of this SOP will have on the Company's financial position or results 
of operations.

         In June 1998, the Financial Accounting Standards Board issued SFAS 
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This 
Statement establishes accounting and reporting standards for derivative 
instruments and for hedging activities. This Statement is effective for 
fiscal years beginning after June 15, 1999. The Company believes that 
adoption of this Statement will have no impact on the Company's financial 
position or results of operations.

                                      F-8
<PAGE>

(2)      PROPERTY AND EQUIPMENT, NET

         Property and equipment, net consists of the following:

<TABLE>
<CAPTION>
                                                                               January 29,         January 30,
                                                                                  1999                1998
                                                                                  ----                ----
<S>                                                                            <C>                 <C>
         Fixtures and equipment......................................          $13,486,409         $ 8,860,634
         Buildings...................................................            1,273,088           1,041,702
         Land and improvements.......................................              319,733             319,733
         Accumulated depreciation and amortization...................           (5,102,780)         (3,423,841)
                                                                               -----------         -----------

         Total property and equipment, net...........................          $ 9,976,450         $ 6,798,228
                                                                               -----------         -----------
                                                                               -----------         -----------
</TABLE>

         Depreciation and amortization expense on property and equipment was 
$1,678,532, $1,094,714 and $913,918 for the fiscal years ended January 29, 
1999, January 30, 1998 and January 31, 1997, respectively.

(3)      NOTES PAYABLE TO BANK

         The Company has a revolving line of credit agreement with its bank 
that permits borrowings up to $7,500,000. Borrowings under the agreement bear 
interest at the bank's prime rate (7.75% at January 29, 1999) plus .5% and 
are secured by substantially all assets of the Company. The agreement 
contains restrictive covenants, which, among other things, require the 
Company to maintain a minimum tangible net worth and minimum current ratios. 
At January 29, 1999 the Company was in compliance with all of the covenants 
under its credit facility.

         The current agreement is subject to renewal by May 31, 1999. There 
was $6,850,000 borrowings outstanding under the agreement as of January 29, 
1999. There were no borrowings outstanding as of January 30, 1998.

                                      F-9
<PAGE>


(4)      LONG-TERM DEBT

<TABLE>
<CAPTION>
Long-term debt consists of the following:                                                 January 29,         January 30, 
                                                                                             1999                1998
                                                                                             ----                ----
<S>                                                                                       <C>                 <C>
Term note payable in monthly  installments of $3,551,  including interest at 6.914%
through  October  2015.  The note is secured by a second  mortgage on the Company's
office  headquarters,  assignment  of a life  insurance  policy,  and the  personal
guarantee of the Company's majority stockholder.................................             $395,281            $407,497


Term note payable in monthly installments of $4,796, including interest at 9.08%
through December 2015. The note is secured by a first mortgage on the Company's
office headquarters.............................................................              492,383             504,143

Note payable in monthly  installments of $2,771 including interest at 7.92% through
December 1999...................................................................               26,156              55,354

$2,300,000  subordinated  note payable to private  placement  holders with interest
due quarterly at 10%.  Principal  installments of $575,000 due annually  commencing
November 30, 2001...............................................................              100,000             250,000
                                                                                              -------             -------

Total Long-Term Debt............................................................            1,013,820           1,216,994

Less current maturities.........................................................              151,993             305,585
                                                                                              -------             -------

         Long-Term Debt.........................................................             $861,827            $911,409
                                                                                              -------             -------
                                                                                              -------             -------
</TABLE>

         On December 12, 1994, the Company completed a private placement of 
46 units, each unit consisting of a 10% subordinated note due in annual 
installments commencing November 30, 2001 through November 30, 2004, and one 
detachable common stock purchase warrant. Subject to certain adjustments, 
each warrant entitles the holder thereof to purchase 3,994 shares of the 
Company's common stock, $.01 par value, at a price of $1.25 per share anytime 
after November 30, 1995 and before November 30, 2004. The entire proceeds of 
$2,300,000 were recorded as long-term debt. The warrants were converted into 
171,350 shares of common stock concurrent with the consummation of the public 
offering. The Company repaid $150,000 and $2,050,000 of the debt during fiscal
1998 and in the fourth quarter of fiscal 1997, respectively, and expects to pay
the remaining $100,000 in fiscal 1999. Total interest expense for the fiscal 
years ended January 29, 1999, January 30, 1998 and January 31, 1997 was 
$278,824, $839,449 and $809,029, respectively.

         Aggregate annual maturities of long-term debt subsequent to the 
fiscal year-ended January 29, 1999 are as follows:

<TABLE>
<CAPTION>
         YEAR ENDING IN JANUARY:
         -----------------------
<S>                                                                                                        <C>
         2000...........................................................................                   $ 151,993
         2001...........................................................................                      27,865
         2002...........................................................................                      30,327
         2003...........................................................................                      32,869
         2004 and thereafter............................................................                     770,766
                                                                                                             -------

Total maturities of long term debt......................................................                  $1,013,820
                                                                                                          ----------
                                                                                                          ----------
</TABLE>


                                      F-10
<PAGE>

(5)  LEASES

         The Company leases all of its retail stores under noncancelable 
operating leases that have various expiration dates. In addition to base 
rents, certain leases require the Company to pay its share of maintenance and 
real estate taxes, and include provisions for contingent rentals based upon 
sales. Certain of the leases contain renewal options under which the Company 
may extend the terms three to five years.

         Future minimum lease commitments due under noncancelable operating
leases at January 29, 1999 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
-----------------------
<S>                                                                                                      <C>
         2000     ......................................................................                 $ 8,771,636
         2001     ......................................................................                   8,319,612
         2002     ......................................................................                   8,191,964
         2003     ......................................................................                   7,738,108
         2004     ......................................................................                   7,319,693
        Thereafter......................................................................                  22,075,297
                                                                                                          ----------

Total future minimum lease commitments..................................................                 $62,416,310
                                                                                                          ----------
                                                                                                          ----------
</TABLE>

         Rent expense for all operating leases for the years ended January 
29, 1999, January 30, 1998, and January 31, 1997 was $7,135,092, $5,337,555 
and $4,309,403 respectively.

         During fiscal 1998, the Company entered into a capital lease 
agreement for equipment and fixtures. During fiscal 1997, the Company entered 
into a capital lease agreement for software. Future maturities under these 
agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY
----------------------
<S>                                                                                                         <C>
         2000     ......................................................................                    $308,566
         2001     ......................................................................                     268,921
         2002     ......................................................................                     119,106
         2003     ......................................................................                     130,407
         2004     ......................................................................                     116,770
                                                                                                             -------

Total future maturities of capital leases...............................................                    $943,770
                                                                                                            --------
                                                                                                            --------
</TABLE>

                                      F-11
<PAGE>

(6)  INCOME TAXES

         As indicated in Note 1, prior to November 28, 1997, the Company 
elected to be taxed as an S-Corporation under the Internal Revenue Code. The 
Company's earnings or losses for the S-Corporation period are allocated to 
its stockholders for inclusion in their individual tax returns. As a result, 
no provision for federal taxes was required at the corporate level for that 
period. A provision was made for state taxes during the S-Corporation period 
as some states impose a tax upon S-Corporations. The Company has provided 
federal and state income taxes for all periods after November 28, 1997.

         An income tax benefit of approximately $324,000 was recorded for the 
fiscal year ended January 29, 1999. Income tax expense of $5,941 and $5,300 
was recorded for the fiscal years ended January 30, 1998 and January 31, 
1997. These amounts differed from the amounts computed by the U.S. federal 
income tax rate of 34% to pretax income from continuing operations as 
a result of the following:

<TABLE>
<CAPTION>
                                                                                  Fiscal Year Ending:
                                                                   -------------------------------------------------
                                                                     January 29,      January 30,      January 31,
                                                                        1999             1998             1997
                                                                        ----             ----             ----
<S>                                                                  <C>              <C>              <C>
Computed "expected" tax (benefit) expense for twelve-
  month period...................................................     $(287,067)      $(25,756)         $416,944
Increase (reduction) in income taxes resulting from:
   Adjustment to reflect S-Corporation election..................           ---        (15,644)         (416,944)
   Adjustment to deferred tax assets and liabilities to
   reflect adoption of SFAS 109..................................           ---         43,251               ---
   State and local income taxes, net of federal income tax
   benefit.......................................................       (48,548)        (1,313)            5,300
Other permanent differences......................................        11,961          5,403               ---
                                                                      ----------       -------          --------
Total income tax (benefit) expense...............................     $(323,654)       $ 5,941           $ 5,300
                                                                      ----------       -------          --------
                                                                      ----------       -------          --------
</TABLE>

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                                                                  Fiscal Year Ending:
                                                                   -------------------------------------------------
                                                                     January 29,      January 30,      January 31,
                                                                        1999             1998             1997
                                                                        ----             ----             ----
<S>                                                                  <C>              <C>              <C>
Current:
  Federal........................................................     $     ---         $  ---            $  ---
  State..........................................................           ---          5,039             5,300
                                                                      ---------         ------            ------
                                                                            ---          5,039             5,300
Deferred:
  Federal........................................................      (275,106)           767               ---
  State..........................................................       (48,548)           135               ---
                                                                      ---------         ------            ------
                                                                       (323,654)           902               ---

Total income tax (benefit) expense...............................     $(323,654)        $5,941            $5,300
                                                                      ---------         ------            ------
                                                                      ---------         ------            ------
</TABLE>

                                      F-12
<PAGE>

         The tax effects of temporary differences that give rise to 
significant portions of the deferred tax assets and deferred tax liabilities 
at January 29, 1999 and January 30, 1998 are presented below.

<TABLE>
<CAPTION>
                                                                                                As of:
                                                                                  ----------------------------------
                                                                                      January 29,       January 30,
Deferred tax assets:                                                                     1999              1998
                                                                                         ----              ----
<S>                                                                                   <C>               <C>          
   Accounts receivable principally due to allowance for doubtful
accounts............................................................................   $      ---           $  4,800
   Inventories, principally due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986.....................................      156,500            103,040
   Difference in timing of lease deductions.........................................      454,911            296,874
   Net operating loss carryforward..................................................      529,843            237,988
                                                                                        ---------           --------
         Total gross deferred tax asset.............................................    1,141,254            642,702
                                                                                        ---------           --------

Deferred tax liabilities:

   Plant and equipment, principally due to differences in depreciation and
capitalized interest................................................................      623,922            467,702
   Software, principally due to the differences in amortization.....................      121,733            103,056
                                                                                        ---------           --------
         Total gross deferred liabilities...........................................      745,655            570,758
                                                                                        ---------           --------
         Net deferred tax asset.....................................................   $  395,599           $ 71,944
                                                                                        ---------           --------
                                                                                        ---------           --------
</TABLE>

At January 29, 1999, the Company has a net operating loss carryforward for 
federal income tax purposes of $1,324,607 which is available to offset future 
federal taxable income, if any, through 2019.

(7)      RELATED PARTY TRANSACTIONS

         A related party of one of the Company's majority stockholders had 
previously owned four of the Company's franchise stores. On November 9, 1998, 
the Company purchased all the assets of these four franchise stores. The 
total purchase price was $1,349,974, which was made up of both cash and 
stock. Goodwill in the amount of $267,974 was recognized on this purchase. 
Continuing franchise fees collected from this related party were $88,728 and 
108,034, in 1998 and 1997 respectively. The Company had no outstanding 
receivable as of January 29, 1999 and a $6,940 receivable from this 
franchisee at January 30, 1998.

         A related party of one of the Company's majority stockholders 
substantially owns one of the Company's franchise stores. Continuing fees 
collected from this related party were $24,810 and $22,777 for the years 
ended January 29, 1999 and January 30, 1998, respectively. The Company had a 
receivable of $708 and $317 from this franchisee as of January 29, 1999 and 
January 30, 1998, respectively.

(8)      EQUITY TRANSACTIONS AND WEIGHTED AVERAGE SHARE DISCLOSURE

         In December 1998, the Company issued 70,749 shares of common stock 
in partial consideration for the purchase of Prickly Pear Paper, Inc.

                                      F-13
<PAGE>

         In February 1997, the Board of Directors of the Company increased 
the number of common shares authorized for issuance from 200,000 to 
40,000,000 and authorized 10,000,000 shares of serial preferred stock.

         In September 1997, the Board of Directors of the Company declared a 
37.57217275 to 1 common stock split increasing the number of common shares 
issued and outstanding from 58,629 to 2,202,818. All references to share and 
per share amounts in the accompanying consolidated financial statements 
reflect this stock split.

         In November and December 1997, the Company registered and sold a 
total of 1,985,800 shares of common stock at a price of $7.50 each in a 
public offering pursuant to the Securities Act of 1933. Total proceeds to the 
Company were $13,850,955. This amount, net of other related costs of the 
offering of $716,028 has been reflected in common stock and additional paid 
in capital in these consolidated financial statements.

         In December 1997, the Company requested the holders of its 10% 
Subordinated Notes issued in 1994 to surrender the Notes. Each Note had one 
detachable common stock warrant good for 3,725 shares of common stock. 
Accordingly, 171,350 shares of common stock were issued when the Notes were 
prepaid.

         A reconciliation of weighted average shares used in the earnings per 
share calculation is as follows:

<TABLE>
<CAPTION>
                                                              Fiscal Year Ending
                                    ------------------------------------------------------------------------
                                         January 29,              January 30,             January 31,
                                            1999                     1998                     1997
                                            ----                     ----                     ----
<S>                                      <C>                      <C>                     <C>
         Basic weighted
           average shares......           4,572,979                2,630,811               2,202,818
         Potential common
           Shares..............              ---                      ---                    311,432
         Diluted weighted                 ---------                ---------               ---------
           average shares......           4,572,979                2,630,811               2,514,250
                                          ---------                ---------               ---------
                                          ---------                ---------               ---------
</TABLE>

(9) STOCK OPTIONS

         In order to attract and retain employees and directors, while 
preserving cash resources, the Company has, since going public, utilized 
stock option awards. During fiscal 1997, the Company adopted a stock option 
plan (the Plan) pursuant to which the Company may grant stock options to 
employees and the Board of Directors. The Plan authorizes grants of options 
to purchase up to 639,641 shares of authorized but unissued common stock. 
Stock options are granted with an exercise price equal to the stock's fair 
market value at the date of grant. All stock options have ten-year terms and 
vest ratably over three years from the date of grant.

         At January 29, 1999, there were options issued and outstanding to 
purchase 412,200 shares of the Company's common stock issued to employees and 
directors. In fiscal 1998, the Company granted stock option awards to certain 
of its employees and directors for the purchase of an aggregated of 227,750 
shares of the Company's common stock. These options are exercisable at prices 
from $2.07 to $5.00 per share and expire in 2008. During fiscal 1997, 184,450 
options were awarded to certain of its employees and directors. These options 
are exercisable at $7.50 per share and expire in 2007.

                                      F-14
<PAGE>

         The per share weighted-average fair value of these options using the 
Black Scholes option-pricing model is $2.10 with the following 
weighted-average assumptions: volatility 60%, expected dividend yield .0%, 
risk-free rate of 5.5%, and an expected life of 5 years.

         Details of the status of stock options as of January 29, 1999 are 
reflected in the table below.

<TABLE>
<CAPTION>
                                                                                             Weighted-
                                                     Shares Under           Price             Average
                                                        Option              Range          Exercise Price
                                                        ------              -----          --------------
<S>                                                  <C>                    <C>            <C>
         Unexercised options outstanding
         January 31, 1997....................            ---                 ---                 ---
           Options granted...................          184,450              $7.50               $7.50
           Options exercised.................            ---                 ---                 ---
           Options forfeited.................            ---                 ---                 ---
                                                      --------           -----------            ----- 

         Unexercised options outstanding
         January 30, 1998....................          184,450              $7.50               $7.50
           Options granted...................          227,750           $2.07-$5.00            $2.90
           Options exercised.................            ---                 ---                 ---
           Options forfeited.................            ---                 ---                 ---
                                                      --------           -----------            ----- 

         Unexercised options outstanding
         January 29, 1999....................          412,200           $2.75-$7.50            $4.96
                                                      --------           -----------            ----- 
                                                      --------           -----------            ----- 
</TABLE>

         The following table summarizes information concerning options
outstanding and exercisable as of January 29, 1999:

<TABLE>
<CAPTION>
                                                              Outstanding Options       Exercisable Options
                                                              -------------------       -------------------
<S>                                                           <C>                       <C>
         Number of options...........................                     412,200                    61,483
         Weighted average remaining contractual life,
         in years....................................                        9.36                      8.83
         Weighted average exercise price.............                       $4.96                     $7.50
</TABLE>

         The Company applies ABP Opinion No. 25 in accounting for options 
granted under its stock option plans and accordingly, no compensation cost 
has been recognized for its stock options granted to its employees or 
directors in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock 
options under SFAS No. 123, the Company's net loss would have increased to 
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                 Fiscal Year 1998          Fiscal Year 1997
                                                                 ----------------          ----------------
<S>                                                              <C>                       <C>
         Net loss - as reported in fiscal 1998 
         and as reported pro forma assuming 
         C-Corp status in fiscal 1997................                  ($520,660)                ($206,610)
         Net loss - pro forma........................                  ($677,149)                ($500,291)
         Net loss per share - as reported in fiscal
         1998 and as reported pro forma assuming 
         C-Corp status in fiscal 1997................                     ($0.11)                   ($0.08)
         Net loss per share - pro forma..............                     ($0.15)                   ($0.19)

</TABLE>

                                      F-15
<PAGE>


(10)     EMPLOYEE BENEFITS

         The Company has a retirement savings plan covering substantially all 
employees who have completed one year of service and attained 21 years of 
age, which includes a noncontributory profit sharing plan and 401(k) feature. 
Employees become fully vested in the plan on a graduated scale over a 
six-year period. Contributions to the profit sharing plan are made at the 
discretion of the plan committee. The 401(k) feature allows for employee's 
elective salary deferrals up to 15% of their compensation, but not in excess 
of certain limitations. There were no discretionary contributions to the 
profit sharing plan in any of the fiscal years.

         The Company has a Voluntary Employee Benefit Plan and Employee 
Benefit Trust for the sole and exclusive benefit of its employees. The 
Company matches 25% of the first 4% of employee contributions to the plan. 
Company contributions were $34,358 and $25,422 for the years ended January 
29, 1999 and January 30, 1998, respectively.

         On December 7, 1998, the Board approved an Employee Stock Purchase 
Plan to be approved by the Shareholders at the 1999 Annual Meeting. If 
approved by the Shareholders, the first enrollment period is not expected to 
begin until August 1, 1999.

(11)     EXTRAORDINARY CHARGE

         Upon completing the Company's initial public offering in November 
1997, the Company exercised its option to repay subordinated debt. The 
Company then took a one-time charge of $182,611, which represented the 
unamortized portion of the fees associated with the debt. This amount is 
shown as an extraordinary charge in the accompanying Consolidated Statement 
of Operations for the fiscal year ended January 30, 1998.

(12)     SUBSEQUENT EVENT (UNAUDITED)

         On April 8, 1999 the Company refinanced its corporate office 
building. The $1.1 million term note is payable in monthly installments of 
$8,612, including interest at 7.125%, through May 2009. The note is secured 
by a first mortgage on the Company's office headquarters.

                                      F-16
<PAGE>


(a)(2) Financial Statement Schedules

         None.

(a)(3)   Exhibits

         The exhibits to this Annual Report on Form 10-K are listed in the
Exhibit Index attached hereto.

         A copy of any of the exhibits listed or referred to above will be 
furnished at a reasonable cost to any person who was a shareholder of the 
Company on April 30, 1999, upon receipt from any such person of a written 
request for any such exhibit. Such request should be sent to Paper Warehouse, 
Inc., 7630 Excelsior Boulevard, Minneapolis, Minnesota 55426; Attn: 
Shareholder Relations.

         The following is a list of each management contract or compensatory 
plan or arrangement required to be filed as an exhibit to this Annual Report 
on Form 10-K pursuant to Item 14(a)(3):

         1.       1997 Stock Option and Compensation Plan (incorporated by
                  reference to the Company's Registration Statement on Form S-1
                  File No. 333-36911).

         2.       Directors' Stock Option Plan (incorporated by reference to the
                  Company's Registration Statement on Form S-1 File No.
                  333-36911).

         3.       Employment Agreement by and between the Company and Yale T.
                  Dolginow dated February 7, 1997 (incorporated by reference to
                  the Company's Registration Statement on Form S-1 File No.
                  333-36911).

         4.       Employment Agreement by and between the Company and Brent D.
                  Schlosser dated February 7, 1997 (incorporated by reference to
                  the Company's Registration Statement on Form S-1 File No.
                  333-36911).

         5.       Amendment Number 1 to the Employment Agreement by and between
                  the Company and Brent D. Schlosser dated September 26, 1997
                  (incorporated by reference to the Company's Form 10-K for 
                  the fiscal year ended January 31, 1998 File No. 0-23389).

         6.       Employment Agreement by and between the Company and Cheryl W.
                  Newell dated July 14, 1997 (incorporated by reference to the
                  Company's Registration Statement on Form S-1 File No.
                  333-36911).

         7.       1998 Employee Stock Purchase Plan (filed herewith 
                  electronically).

(b)      Reports on Form 8-K.

         The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 1998.

                                       -30-
<PAGE>

                                     SIGNATURES

         In accordance with Section 13 or 15(d) 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.

                                 PAPER WAREHOUSE, INC.

Date:  April 28, 1999

                                 By: /s/ Yale T. Dolginow
                                 ---------------------------------------------
                                 Name: Yale T. Dolginow
                                 Title: President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below by the following persons on behalf of the 
registrant and in the capacities indicated on April 28, 1999.

<TABLE>
<CAPTION>
NAME                                      TITLE
<S>                                       <C>
/s/      Yale T. Dolginow                 Chairman of the Board, President and
   ---------------------------------      Chief Executive Officer, (principal
         Yale T. Dolginow                 executive officer)

/s/      Brent D. Schlosser               Executive Vice President and Director
   ---------------------------------
         Brent D. Schlosser

/s/      Diane C. Dolginow                Secretary and Director
   ---------------------------------
         Diane C. Dolginow

s/       Arthur H. Cobb                   Director
  ----------------------------------
         Arthur H. Cobb

/s/      Marvin W. Goldstein              Director
   ---------------------------------
         Marvin W. Goldstein

/s/      Martin A. Mayer                  Director
   ---------------------------------
         Martin A. Mayer

/s/      Jeffery S. Halpern               Director
   ---------------------------------
         Jeffery S. Halpern

/s/      Cheryl W. Newell                 Vice President and Chief Financial
   ---------------------------------      Officer (principal financial officer)
         Cheryl W. Newell

/s/      Michael A. Anderson              Controller/Treasurer (principal
   ---------------------------------      accounting officer)
         Michael A. Anderson

</TABLE>


                                       -31-
<PAGE>

                                       
                             PAPER WAREHOUSE, INC.
                EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
                 FOR THE FISCAL YEAR ENDED JANUARY 29, 1999
<TABLE>
<CAPTION>
ITEM NO.       DESCRIPTION OF ITEM                                                  METHOD OF FILING
--------       -------------------                                                  ----------------
<S>            <C>                                                                  <C>
3.1            Amended and Restated Articles of Incorporation                       Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

3.2            Amended and Restated By-laws                                         Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

4.1            Form of 10% Subordinated Note due November 30, 2004, dated           Incorporated by reference to the
               December 7, 1994                                                     Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

4.2            Form of Warrant Agreement                                            Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

4.3            Form of Warrant Conversion Agreement, as extended                    Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.1           1997 Stock Option and Compensation Plan                              Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.2           Directors' Stock Option Plan                                         Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.3           Corporation Tax Allocation and Indemnification Agreement entered     Incorporated by reference to the
               into on September 26, 1997 between the Company and Yale T.           Company's Registration Statement on
               Dolginow and Brent D. Schlosser                                      Form S-1 (File No. 333-36911).

10.4           Employment Agreement by and between the Company and Yale T.          Incorporated by reference to the
               Dolginow dated February 7, 1997                                      Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.5           Employment Agreement by and between the Company and Brent D.         Incorporated by reference to the
               Schlosser dated February 7, 1997                                     Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.6           Amendment Number 1 to the Employment Agreement by and between the    Incorporated by reference to the
               Company and Brent D. Schlosser dated September 26, 1997              Company's Form 10-K for fiscal 
                                                                                    year ended January 31, 1998
                                                                                    (File No. 0-23389).

10.7           Combination Mortgage and Security Agreement and Fixture Financing    Incorporated by reference to the
               Statement dated June 9, 1995 by and between the Company and          Company's Registration Statement on
               Richfield Bank & Trust Co.                                           Form S-1 (File No. 333-36911).

                                       -32-
<PAGE>

10.8           Secured Promissory Note of the Company in favor of Richfield Bank    Incorporated by reference to the
               & Trust Co. in the amount of $945,000 dated June 9, 1995             Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.9           Authorization and Debenture Guaranty of the Company dated May 25,    Incorporated by reference to the
               1995                                                                 Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.10          Employment Agreement by and between the Company and Cheryl W.        Incorporated by reference to the
               Newell dated July 14, 1997                                           Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.11          Loan Agreement between Paper Warehouse, Inc., Yale T. Dolginow and   Incorporated by reference to the
               Richfield Bank & Trust Co., dated January 29, 1997                   Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.12          Revolving Promissory Note to Richfield Bank & Trust Co. dated        Incorporated by reference to the
               January 29, 1997                                                     Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.13          Security Agreement between the Company and Richfield Bank & Trust    Incorporated by reference to the
               Co. dated January 29, 1997                                           Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.14          Amendment to Loan Agreement entered into as of October 1, 1997 by    Incorporated by reference to the
               and between the Company, Yale T. Dolginow and Richfield Bank &       Company's Registration Statement on
               Trust Co.                                                            Form S-1 (File No. 333-36911).

10.15          Master Lease by and between Target Financial, Inc. and the Company   Incorporated by reference to the
               dated October 22, 1997                                               Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.16          Loan Agreement SBA Debenture No. COCL837046 3001 MN, dated August    Incorporated by reference to the
               15, 1995                                                             Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

10.17          Consulting Agreement entered into December 1, 1992 by and between    Incorporated by reference to the
               Paper Warehouse, Inc. and Stanford Weiner, Lawrence Weiner and       Company's Registration Statement on
               Gary Stone                                                           Form S-1 (File No. 333-36911).

10.18          1998 Employee Stock Purchase Plan                                    Filed herewith electronically.

10.19          Asset Purchase Agreement dated December 17, 1998 among the           Filed herewith electronically.
               Company, Susan Hazan and Prickly Pear Paper, Inc.

10.20          Second Amendment to Loan Agreement dated March 15, 1999 between      Filed herewith electronically.
               the Company and Richfield Bank & Trust Co.

10.21          Third Amendment to Loan Agreement dated March 31, 1998 between       Filed herewith electronically.
               the Company and Richfield Bank & Trust Co.

21             Subsidiaries of Company                                              Incorporated by reference to the
                                                                                    Company's Registration Statement on
                                                                                    Form S-1 (File No. 333-36911).

23             Consent of KPMG Peat Marwick LLP                                     Filed herewith electronically.

27             Financial Data Schedule                                              Filed herewith electronically.

</TABLE>

                                       -33-