<PAGE>


                               PAPER WAREHOUSE, INC.
                         1998 EMPLOYEE STOCK PURCHASE PLAN

1.     PURPOSE.

       The purpose of this 1998 Employee Stock Purchase Plan (the "Plan") is to
advance the interests of Paper Warehouse, Inc. (the "Company") and its
shareholders by providing Eligible Employees of the Company and its
Participating Subsidiaries with an opportunity to acquire an ownership interest
in the Company through the purchase of Common Stock of the Company on favorable
terms through payroll deductions.  The Company intends that the Plan qualify as
an "employee stock purchase plan" under Section 423 of the Code.  Accordingly,
provisions of the Plan will be construed so as to extend and limit participation
in a manner consistent with the requirements of Section 423 of the Code.

2.     DEFINITIONS.

       2.1    "BOARD" means the Board of Directors of the Company.

       2.2    "CHANGE IN CONTROL" means an event described in Section 9.1 of the
Plan.

       2.3    "CODE" means the Internal Revenue Code of 1986, as amended.

       2.4    "COMMITTEE" means the group of individuals administering the Plan,
as provided in Section 3 of the Plan.

       2.5    "COMMON STOCK" means the common stock, par value $0.01 per share,
of the Company, or the number and kind of shares of stock or other securities
into which such common stock may be changed in accordance with Section 4.3 of
the Plan.

       2.6    "COMPENSATION" means all gross cash compensation (including wage,
salary, incentive, bonus, commission and overtime earnings) paid by the Company
or any Participating Subsidiary to a Participant, including amounts that would
have constituted compensation but for a Participant's election to defer or
reduce compensation pursuant to any deferred compensation, cafeteria, capital
accumulation or any other similar plan of the Company; provided, however, that
the Committee, in its sole discretion, may expand or limit the amounts that will
be deemed compensation for purposes of the Plan in such manner as it deems
appropriate.

       2.7    "ELIGIBLE EMPLOYEE" means any employee of the Company or a
Participating Subsidiary who, with respect to any Offering Period, has been
continuously employed by the Company or a Participating Subsidiary for at least
one year prior to the Offering Commencement Date for such Offering Period.  With
respect to a Subsidiary that has been acquired by the Company and designated as
a Participating Subsidiary or a Subsidiary that is otherwise subsequently
designated by the Committee as a Participating Subsidiary, the period of
employment of employees of such Participating Subsidiary occurring prior to the
time of such acquisition or designation will be included for purposes of
determining whether an employee has been employed for the requisite period of
time under the Plan.

       2.8    "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

       2.9    "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the


<PAGE>

Common Stock is listed, admitted to unlisted trading privileges or reported on
any foreign or national securities exchange or on the Nasdaq National Market or
an equivalent foreign market on which sale prices are reported; (b) if the
Common Stock is not so listed, admitted to unlisted trading privileges or
reported, the closing bid price as reported by the Nasdaq SmallCap Market, OTC
Bulletin Board, National Quotation Bureau, Inc. or other comparable service; or
(c) if the Common Stock is not so listed or reported, such price as the
Committee determines in good faith in the exercise of its reasonable discretion.

       2.10   "OFFERING COMMENCEMENT DATE" means the first day of an Offering
Period.

       2.11   "OFFERING PERIOD" means any of the offerings to Participants of
Options under the Plan, each continuing for six months, as described in Section
6 of the Plan.

       2.12   "OFFERING TERMINATION DATE" means the last day of an Offering
Period.

       2.13   "OPTION" means a right to purchase shares of Common Stock granted
to a Participant in connection with an Offering Period pursuant to Section 7 of
the Plan.

       2.14   "OPTION PRICE" means, with respect to any Offering Period, the
lower of (a) 85% of the Fair Market Value of one share of Common Stock on the
Offering Commencement Date, or (b) 85% of the Fair Market Value of one share of
Common Stock on the Offering Termination Date.

       2.15   "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan pursuant to Section 5 of the Plan.

       2.16   "PARTICIPATING SUBSIDIARY" means a Subsidiary that has been
designated by the Committee from time to time, in its sole discretion, as a
corporation whose Eligible Employees may participate in the Plan.

       2.17   "SECURITIES ACT" means the Securities Act of 1933, as amended.

       2.18   "SUBSIDIARY" means any subsidiary corporation of the Company
within the meaning of Section 424(f) of the Code.

       2.19   "TERMINATION OF EMPLOYMENT" means a Participant's complete
termination of employment with the Company and all Participating Subsidiaries
for any reason, including death, disability or retirement.  In the event that a
Participant is in the employ of a Participating Subsidiary and the Participating
Subsidiary ceases to be a Participating Subsidiary of the Company for any
reason, such event will be deemed a termination of employment unless the
Participant continues in the employ of the Company or another Participating
Subsidiary.

3.     ADMINISTRATION.

       The Plan will be administered by the Board or by a Committee of the
Board.  So long as the Company has a class of its equity securities registered
under Section 12 of the Exchange Act, the Plan will be administered by a
Committee of the Board consisting of at least two members of the Board who are
"non-employee directors" within the meaning of Rule 16b-3 under the Exchange
Act.  Such a Committee will act by majority approval of the members (but may
also take action with the written consent of a majority of the members of such
Committee), and a majority of the members of such a Committee will constitute a
quorum.  As used in the Plan, "Committee" will refer to the Board or to such a
Committee, if established.  To the extent consistent with corporate law, the
Committee may delegate to


                                          2
<PAGE>

any officer of the Company the duties, power and authority of the Committee
under the Plan pursuant to such conditions or limitations as the Committee may
establish; provided, however, that only the Committee may exercise such duties,
power and authority with respect to Participants who are subject to Section 16
of the Exchange Act.  The Committee may exercise its duties, power and authority
under the Plan in its sole discretion without the consent of any Participant or
other party, unless the Plan specifically provides otherwise.  Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of the Plan will be final, conclusive and binding for
all purposes and on all persons, including, without limitation, the Company, the
shareholders of the Company, the Participants and their respective
successors-in-interest.  No member of the Committee will be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under the Plan.


4.     SHARES AVAILABLE FOR ISSUANCE; ADJUSTMENTS FOR CERTAIN EVENTS.

       4.1    MAXIMUM NUMBER OF SHARES AVAILABLE.  Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be one hundred
fifty thousand (150,000) shares of Common Stock.  If the total number of shares
of Common Stock that would otherwise be issuable upon the exercise of Options
granted pursuant to Section 7 of the Plan on any Offering Termination Date
exceeds the number of shares then available for issuance under the Plan, the
Committee will make a pro rata allocation of the shares of Common Stock
remaining available for issuance under the Plan in as uniform and equitable a
manner as it deems appropriate.

       4.2    ACCOUNTING FOR OPTIONS.  Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Options will be applied to
reduce the maximum number of shares of Common Stock remaining available for
issuance under the Plan.  Any shares of Common Stock that are subject to an
Option that is terminated unexercised will automatically again become available
for issuance under the Plan.

       4.3    ADJUSTMENTS TO SHARES AND OPTIONS.  In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, the number and kind of securities or other property (including
cash) subject to, and the exercise price of, outstanding Options.

5.     PARTICIPATION; PAYROLL DEDUCTIONS.

       5.1    PARTICIPATION.  Participation in the Plan is voluntary and is not
a condition of employment.  Eligible Employees may elect to participate in the
Plan, beginning with the first Offering Period to commence after such person
becomes an Eligible Employee, by properly completing a subscription agreement
authorizing payroll deductions on the form provided by the Company and filing
the participation form with the Company's Human Resources Department not later
than the 1st day of the month immediately preceding the Offering Commencement
Date of the first Offering Period in which the Participant wishes to
participate.  An Eligible Employee who elects to participate with respect to an
Offering Period will be deemed to have elected to participate in each subsequent
Offering Period, unless


                                          3
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such Participant properly completes and files a notice of withdrawal form in the
manner described in Section 8.1 of the Plan.

       5.2    LIMITATION ON PARTICIPATION.  Notwithstanding any provisions of
the Plan to the contrary, an Eligible Employee may not participate in the Plan
and will not be granted an Option under the Plan if, immediately after the grant
of such Option, such Eligible Employee (or any other person whose stock
ownership would be attributed to such Eligible Employee pursuant to Section
424(d) of the Code) would own stock or options possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company or
of its "Parent" or "Subsidiary" corporations (within the meaning of Section 424
of the Code).

       5.3    PAYROLL DEDUCTIONS.

              (a)    By completing and filing a participation form, a
       Participant will elect to have payroll deductions made from such
       Participant's total Compensation (in whole dollar amounts, provided,
       however, that such dollar amounts may not exceed 15%, or such other
       maximum percentage as the Committee may from time to time establish, of
       the Participant's total Compensation) on each payday during the time he
       or she is a Participant in the Plan in such amount as such Participant
       designates on the participation form.

              (b)    All payroll deductions authorized by a Participant will be
       credited as of each payday to an account established under the Plan for
       the Participant.  Such account will be solely for bookkeeping purposes,
       no separate fund, trust or other segregation of such amounts will be
       established or made and the amounts represented by such account will be
       held as part of the Company's general assets, usable for any corporate
       purpose.  A Participant may not make any separate cash payment or
       contribution to such Participant's account.  No interest will accrue on
       amounts held in such accounts under the Plan.

              (c)    A Participant may increase or decrease the amount of his or
       her payroll deductions under the Plan (subject to such limitations on the
       frequency of such changes as may be imposed by rules adopted by the
       Committee from time to time) by properly completing an amended
       participation form and filing it with the Company's Human Resources
       Department not less than 30 days prior to the commencement of the pay
       period for which such change in payroll deductions is to be effective or,
       with respect to commissions, bonuses or other Compensation that is
       indeterminate and subject to performance goals or criteria, not less than
       10 days prior to the date that such performance related Compensation is
       paid.

              (d)    A Participant may withdraw from participation in the Plan
       at any time as provided in Section 8.1 of the Plan.

6.     OFFERING PERIODS.

       Options to purchase shares of Common Stock will be offered to
Participants under the Plan through a continuous series of Offering Periods,
each continuing for six months, and each of which will commence on February 1
and August 1 of each year, as the case may be, and will terminate on July 31 and
January 31 of such year, as the case may be.  The first Offering Period will
commence on August  1, 1999 and terminate on January  31, 2000.  Offering
Periods under the Plan will continue until either (a) the Committee decides, in
its sole discretion, that no further Offering Periods will be made because the
Common Stock remaining available under the Plan is insufficient to make an
Offering to all Eligible Employees, or (b) the Plan is terminated in accordance
with Section 13 below.



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7.     OPTIONS.

       7.1    GRANT OF OPTIONS.  With respect to any Offering Period, each
Participant participating in such Offering Period will be granted, by operation
of the Plan on the Offering Commencement Date for such Offering Period, an
Option to purchase (at the Option Price) as many full shares of Common Stock as
such Participant will be able to purchase with the accumulated payroll
deductions credited to such Participant's account during such Offering Period
plus the balance (if any) carried forward from the Participant's payroll
deduction account from the preceding Offering Period.

       7.2    LIMITATIONS ON PURCHASE.  Notwithstanding Section 7.1 or any other
provision of the Plan to the contrary, the number of shares of Common Stock that
may be purchased under the Plan will be limited as follows:

              (a)    No Participant may purchase more than 5,000 shares of
       Common Stock under the Plan in any given Offering Period; and

              (b)    No Participant may be granted an Option that permits such
       Participant to purchase Common Stock under the Plan and any other
       "employee stock purchase plans" (within the meaning of Section 423 of the
       Code) of the Company and its Subsidiaries to accrue (I.E., become
       exercisable) at a rate that exceeds $25,000 of the Fair Market Value of
       such shares of Common Stock (determined at the time such Option is
       granted) for each calendar year in which such Option is outstanding at
       any time.

       7.3    EXERCISE OF OPTIONS.

              (a)    Unless a Participant withdraws from the Plan as provided in
       Section 8.1 of the Plan, the Participant's Option for the purchase of
       shares of Common Stock granted with respect to an Offering Period will be
       exercised automatically at the Offering Termination Date of such Offering
       Period for the purchase of the number of full shares of Common Stock that
       the accumulated payroll deductions in such Participant's account as of
       such Offering Termination Date will purchase at the applicable Option
       Price.

              (b)    A Participant may only purchase one or more full shares in
       connection with the automatic exercise of an Option granted for any
       Offering Period.  The portion of any balance remaining in a Participant's
       payroll deduction account at the close of business on the Offering
       Termination Date of any Offering Period that is less than the purchase
       price of one full share of Common Stock will be carried forward into the
       Participant's payroll deduction account for the following Offering
       Period.  In no event, however, will the balance carried forward be equal
       to or greater than the purchase price of one full share of Common Stock
       on the Offering Termination Date of an Offering Period.

              (c)    No Participant (or any person claiming through such
       Participant) will have any interest in any Common Stock subject to an
       Option under the Plan until such Option has been exercised, at which
       point such interest will be limited to the interest of a purchaser of the
       Common Stock purchased upon such exercise pending the delivery of such
       Common Stock.

              (d)    As promptly as practicable after the Offering Termination
       Date of each Offering Period, the Company will issue the shares of Common
       Stock purchased upon exercise of such Participant's Option granted for
       such Offering Period, registered in the name of the Participant or, if
       the Participant so directs on his or her Participation Form, in the names
       of the Participant and his or her spouse.  The Committee may determine,
       in its sole discretion, the manner of


                                          5
<PAGE>

       delivery of shares of Common Stock purchased under the Plan, which may be
       by electronic account entry into new or existing brokerage or other
       accounts, delivery of physical stock certificates or such other means as
       the Committee deems appropriate.

8.     WITHDRAWAL FROM PLAN.

       8.1    VOLUNTARY WITHDRAWAL.  A Participant may, at any time on or before
5:00 p.m., Minnesota time, on the first day of the last month of an Offering
Period, terminate his or her participation in the Plan and withdraw all, but not
less than all, of the payroll deductions credited to such Participant's account
under the Plan by giving written notice to the Company's Human Resources
Department.  Such notice must state that the Participant wishes to terminate his
or her participation in the Plan and request the withdrawal of all of the
Participant's payroll deductions held under the Plan.  All of the Participant's
payroll deductions credited to his or her account will be paid to such
Participant as soon as practicable after receipt of the notice of withdrawal,
such Participant's Option for such Offering Period will automatically be
canceled and will no longer be exercisable, and no further payroll deductions
for the purchase of shares of Common Stock under the Plan will be made.

       8.2    TERMINATION OF EMPLOYMENT.

              (a)    Upon the Termination of Employment of a Participant at any
       time, the payroll deductions credited to such Participant's account will
       be paid to such Participant as soon as practicable after the effective
       date of such Termination of Employment (or, in the case of death, to the
       person or persons entitled thereto under Sections 10 and 11.3 of the
       Plan), such Participant's Option for the current Offering Period will
       automatically be canceled and will no longer be exercisable, and no
       further payroll deductions for the purchase of shares of Common Stock
       under the Plan will be made.

              (b)    Unless the Committee otherwise determines in its sole
       discretion, a Participant's employment will, for purposes of the Plan, be
       deemed to have terminated on the date recorded on the personnel or other
       records of the Company or the Participating Subsidiary for which the
       Participant provides employment, as determined by the Committee in its
       sole discretion based upon such records.

       8.3    EFFECT OF WITHDRAWAL.  A Participant's withdrawal pursuant to
Section 8.1 of the Plan will not have any effect upon such Participant's
eligibility to participate in a subsequent Offering Period (so long as such
Participant completes and files a new Participation Form pursuant to Section 5
of the Plan) or in any similar plan that may hereafter be adopted by the
Company.

9.     CHANGE IN CONTROL.

       9.1    CHANGE IN CONTROL.  For purposes of this Section 9, a "CHANGE IN
CONTROL" of the Company will mean the following:

              (a)    the sale, lease, exchange or other transfer, directly or
       indirectly, of substantially all of the assets of the Company (in one
       transaction or in a series of related transactions) to a person or entity
       that is not controlled by the Company;

              (b)    the approval by the shareholders of the Company of any plan
       or proposal for the liquidation or dissolution of the Company;



                                          6
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              (c)    any person becomes after the effective date of the Plan the
       "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
       directly or indirectly, of (i) 20% or more, but less than 50%, of the
       combined voting power of the Company's outstanding securities ordinarily
       having the right to vote at elections of directors, unless the
       transaction resulting in such ownership has been approved in advance by
       the Continuity Directors (as defined in Section 9.2 below), or (ii) 50%
       or more of the combined voting power of the Company's outstanding
       securities ordinarily having the right to vote at elections of directors
       (regardless of any approval by the Continuity Directors);

              (d)    a merger or consolidation to which the Company is a party
       if the shareholders of the Company immediately prior to effective date of
       such merger or consolidation have "beneficial ownership" (as defined in
       Rule 13d-3 under the Exchange Act), immediately following the effective
       date of such merger or consolidation, of securities of the surviving
       corporation representing (i) less than 80%, but more than 50%, of the
       combined voting power of the surviving corporation's then outstanding
       securities ordinarily having the right to vote at elections of directors,
       unless such merger or consolidation has been approved in advance by the
       Continuity Directors, or (ii) 50% or less of the combined voting power of
       the surviving corporation's then outstanding securities ordinarily having
       the right to vote at elections of directors (regardless of any approval
       by the Continuity Directors); or

              (e)    the Continuity Directors cease for any reason to constitute
       at least a majority of the Board.

       Notwithstanding anything in this Section 9.1 to the contrary, the
       transfer by a Significant Shareholder (as defined below) of shares of
       Common Stock or rights to acquire shares of Common Stock to the following
       persons or entities, without consideration in money or money's worth
       (such as by gift, bequest or devise), and the exercise or conversion of
       any such transferred rights to acquire shares, will not, in and of
       itself, be deemed to constitute a Change in Control for purposes of this
       Section 9:  (i) transfers to any spouse, child, heir, legatee or
       successor of such Significant Shareholder; (ii) transfers to any trust
       created for the benefit of such Significant Shareholder or any such
       spouse, child, heir, legatee or successor, and amendments of or
       distributions from any such trust; or (iii) transfers to any other
       Significant Shareholder.  For purpose of this Section 9.1(e),
       "SIGNIFICANT SHAREHOLDER" will mean Yale T. Dolginow and Brent D.
       Schlosser.

       9.2    CONTINUITY DIRECTORS.  For purposes of this Section 9, "CONTINUITY
DIRECTORS" of the Company will mean individuals who are members of the Board on
the effective date of the Plan and any individual who subsequently becomes a
member of the Board whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the Continuity
Directors (either by specific vote or by approval of the Company's proxy
statement in which such individual is named as a nominee for director without
objection to such nomination).

       9.3    ADJUSTMENT OF OFFERING PERIOD.  Without limiting the authority of
the Committee under Sections 3, 4.3 and 13 of the Plan, if a Change in Control
of the Company occurs, the Committee, in its sole discretion, may (a) accelerate
the Offering Termination Date of the then current Offering Period and provide
for the exercise of Options thereunder by Participants in accordance with
Section 7.3 of the Plan, or (b) accelerate the Offering Termination Date of the
then current Offering Period and provide that all payroll deductions credited to
the accounts of Participants will be paid to Participants as soon as practicable
after such Offering Termination Date and that all Options for such Offering
Period will automatically be canceled and will no longer be exercisable.


                                          7
<PAGE>

10.    DESIGNATION OF BENEFICIARY.

       A Participant may file with the Company's Human Resources Department a
written designation of a beneficiary who is to receive shares of Common Stock
and cash, if any, under the Plan in the event of such Participant's death prior
to delivery of such shares or cash to such Participant.  Such designation of
beneficiary may be changed by the Participant at any time by written notice to
the Company's Human Resources Department.  In the event of the death of a
Participant in the absence of a valid designation of a beneficiary who is living
at the time of such Participant's death, (a) the Company will deliver such
shares of Common Stock and cash to the executor or administrator of the estate
of the Participant, or (b) if to the Company's knowledge no such executor or
administrator has been appointed, the Company, in its sole discretion, may
deliver such shares of Common Stock and cash to the spouse or to any one or more
dependents or relatives of the Participant or, if no spouse, dependent or
relative is known to the Company, to such other person as the Company may
designate.

11.    RIGHTS OF ELIGIBLE EMPLOYEES AND PARTICIPANTS; TRANSFERABILITY.

       11.1   NO RIGHT TO EMPLOYMENT.  Nothing in the Plan will interfere with
or limit in any way the right of the Company or any Participating Subsidiary to
terminate the employment of any Eligible Employee or Participant at any time,
nor confer upon any Eligible Employee or Participant any right to continue in
the employ of the Company or any Participating Subsidiary.

       11.2   RIGHTS AS A SHAREHOLDER.  As a holder of an Option under the Plan,
a Participant will have no rights as a shareholder unless and until such Option
is exercised and the Participant becomes the holder of record of shares of
Common Stock.  Except as otherwise provided in the Plan, no adjustment will be
made for dividends or distributions with respect to Options as to which there is
a record date preceding the date the Participant becomes the holder of record of
such shares, except as the Committee may determine in its sole discretion.

       11.3   RESTRICTIONS ON TRANSFER. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an Option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws of
descent and distribution, or as provided in Section 10 of the Plan) by the
Participant.  Any such attempt at assignment, transfer, pledge or other
disposition will be without effect, except that the Company may treat such act
as an election to withdraw from the Plan in accordance with Section 8.1 of the
Plan.  During his or her lifetime, a Participant's Option to purchase shares of
Common Stock under the Plan is exercisable only by such Participant.

12.    SECURITIES LAW AND OTHER RESTRICTIONS.

       Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under the Plan, and a Participant may not sell, assign, transfer
or otherwise dispose of shares of Common Stock issued pursuant to Options
granted under the Plan, unless (a) there is in effect with respect to such
shares a registration statement under the Securities Act and any applicable
state or foreign securities laws or an exemption from such registration under
the Securities Act and applicable state or foreign securities laws, and
(b) there has been obtained any other consent, approval or permit from any other
regulatory body that the Committee, in its sole discretion, deems necessary or
advisable.  The Company may condition such issuance, sale or transfer upon the
receipt of any representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common Stock, as
may be deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.


                                          8
<PAGE>

13.    AMENDMENT OR TERMINATION.

       The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan will conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no amendments
to the Plan will be effective without approval of the shareholders of the
Company if shareholder approval of the amendment is then required pursuant to
Section 423 of the Code or the rules of any stock exchange or Nasdaq or similar
regulatory body.  Upon termination of the Plan, the Committee, in its sole
discretion, may take any of the actions described in Section 9.3 of the Plan.

14.    EFFECTIVE DATE OF PLAN.

       The Plan will be effective as of December 7, 1998, the date it was
adopted by the Board.  The Plan has been adopted by the Board subject to
shareholder approval, and prior to shareholder approval shares of Common Stock
may be issued under the Plan subject to such approval.  The Plan will terminate
at midnight on December 7, 2008 and may be terminated prior to such time by
Board action, and no Option will be granted after such termination.

15.    MISCELLANEOUS.

       15.1   GOVERNING LAW.  The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts of laws
principles of any jurisdictions.

       15.2   SUCCESSORS AND ASSIGNS.  The Plan will be binding upon and inure
to the benefit of the successors and permitted assigns of the Company and the
Participants.


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<PAGE>

                               PAPER WAREHOUSE, INC.
                         1998 EMPLOYEE STOCK PURCHASE PLAN
                                 PARTICIPATION FORM


______        Original Application
______        Change in Payroll Deduction Amount


1.     ___________________________________ hereby elects to participate in the
       1998 Paper Warehouse, Inc. Employee Stock Purchase Plan (the "Plan") and
       subscribes to purchase shares of the Company's Common Stock (the
       "Shares") in accordance with this Agreement and the Plan.

2..    I hereby authorize payroll deductions, beginning ____________, ____, from
       each paycheck in the amount of $_______________ (which amount may not
       exceed 15% of total compensation on each payday) in accordance with the
       Plan.

3.     I understand that said payroll deductions shall be accumulated for the
       purchase of shares in accordance with the Plan, and that shares will be
       purchased for me automatically at the end of each six-month offering
       period under the Plan unless I withdraw my accumulated payroll
       deductions, withdraw from the Plan, or both, by giving written notice to
       the Company prior to the end of the offering period, as provided in the
       Plan.

4.     Shares purchased for me under the Plan should be issued or held in an
       account in the name(s) of:


       _______________________________________________
              (name(s))

       _______________________________________________
              (address)

       _______________________________________________


       _______________________________________________
              (social security number)


5.     I understand that if I dispose of any Shares received by me pursuant to
       the Plan within two years after the first day of the offering period
       during which I purchased such Shares, I may be treated for federal income
       tax purposes as having received ordinary income at the time of such
       disposition in an amount equal to the excess of the fair market value of
       the Shares at the time such Shares were delivered to me over the option
       price paid for the Shares.  I HEREBY AGREE TO NOTIFY THE COMPANY IN
       WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY SUCH DISPOSITION.  However,
       if I dispose of such shares at any time after the expiration of the
       two-year holding period, I understand that I will be treated for federal
       income tax purposes as having received income only at the time of such
       disposition, and that such income will be taxed as ordinary income only
       to the extent of an amount equal to the lesser of (a) the excess of the
       fair market value of the Shares at the time of such disposition over the
       amount paid for the Shares under the


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<PAGE>

       option, or (b) the excess of the fair market value of the Shares over the
       option price, measured as if the option had been exercised on the first
       day of the offering period during which I purchased such shares.  The
       remainder of the gain, if any, recognized on such disposition will be
       taxed at capital gains rates.

6.     I have read the current prospectus for the Plan.




Date:
       -----------------------------------       -------------------------------
                                                 Signature of Employee


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