LOAN AND SECURITY AGREEMENT BETWEEN WELLS FARGO RETAIL FINANCE LLC AND PAPER WAREHOUSE, INC., ET AL TABLE OF CONTENTS

                           (c)         To induce Lender to provide the Eurodollar Rate option on the terms provided herein, if (i) any Eurodollar Loans are repaid in whole or in part prior to the last day of any applicable Eurodollar Period (whether that repayment is made pursuant to any provision of this Agreement or any other Loan Document or is the result of acceleration, by operation of law or otherwise); (ii) Borrowers shall default in payment when due of the principal amount of or interest on any Eurodollar Loan; (iii) Borrowers shall default in making any borrowing of, conversion into or continuation of Eurodollar Loans after a Borrower has given notice requesting the same in accordance herewith; or (iv) Borrowers shall fail to make any prepayment of a Eurodollar Loan after any Borrower has given a notice thereof in accordance herewith, Borrowers shall indemnify and hold harmless Lender from and against all losses, costs and expenses resulting from or arising from any of the foregoing.  Such indemnification shall include any loss (including loss of margin) or expense arising from the reemployment of funds obtained by it or from fees payable to terminate deposits from which such funds were obtained.  This covenant shall survive the termination of this Agreement and the payment of the Liabilities and all other amounts payable hereunder.  As promptly as practicable under the circumstances, Lender shall provide Borrowers with its written calculation of all amounts payable pursuant to this Section 1.8 (c), and such calculation shall be binding on the parties hereto unless Borrowers shall object in writing within ten (10) Business Days of receipt thereof, specifying the basis for such objection in reasonable detail.

                           (d)        Following the occurrence of any Event of Default which has not been remedied within any grace period expressly provided herein or otherwise waived in writing by Lender (and whether or not the Lender exercises any of the Lender’s rights on account of such Event of Default), all loans and Advances made under the Revolving Credit shall, at Lender’s option, bear interest, through the End Date, at a rate which is the aggregate of that provided for in Section 1-8(a), above, plus two (2%) percent per annum.  Lender shall use its best efforts to provide advance notice to Borrowers of its intention to charge interest at the default rate, but Lender’s right to charge such default rate is not subject to notice hereunder.

                           (e)         Accrued interest shall be payable:

                                        (i)          if for Index Rate Loans, monthly in arrears on the first day of the month next following that during which such interest accrued; if for Eurodollar Loans upon the maturity of the subject Eurodollar contract.

                                        (ii)         On the Termination Date.

                                        (iii)        On the End Date.

             1-9.       Fees.    Borrowers shall pay to the Lender the following fees:

                           (a)         Annual Facility Fee.   On each anniversary of the Closing Date hereof, an “Annual Facility Fee” in an amount equal to one quarter of one (0.25%) percent of the Credit Limit (each of which Annual Facility Fees shall be fully earned upon each respective anniversary of the Closing Date occurring on or prior to the End Date), shall be due and payable.

                           (b)        Loan Maintenance Fee.  Intentionally deleted.

                           (c)         Unused Line Fee.  On the first day of each month during the term of this Agreement, an “Unused Line Fee” in an amount equal to one quarter of one  (0.25%) percent of the Average Unused Portion of the Credit Limit.

                           (d)        Commitment Fee.  On the Closing Date, a “Commitment Fee” of three quarters of one (0.75%) percent of the Credit Limit or One Hundred Twelve Thousand Five Hundred ($112,500) Dollars

                           (e)         Excess Plan Fee.  Intentionally deleted.

                           (f)         Financial Examination, Legal Investigation, Documentation, and Appraisal Fees.   Subject to the provisions of Article 9-9, Lender’s actual charges paid or incurred for each financial analysis and examination (i.e., audits) of Borrowers performed by personnel employed by Lender; Lender’s actual charges paid or incurred for each appraisal of the Collateral performed by personnel employed by Lender; and, the actual charges paid or incurred by Lender if it elects to employ the services of one or more third Persons to perform legal investigation, documentation, financial analysis and examinations (i.e., audits) of Borrowers or to appraise the Collateral.

                           (g)        In addition to any other right to which the Lender is then entitled on account thereof, the Lender may assess a reasonable additional fee payable by the Borrowers on account of the accommodation of Lender to the Borrowers’ request that the Lender depart or dispense with one or more of the administrative provisions of this Agreement and/or the Borrower’s failure to comply with any of such provisions.

                                        (i)          By way of non-exclusive example, the Lender may assess a fee on account of any of the following:

                                        (ii)         The inclusion of the foregoing right on the part of the Lender to assess a fee does not constitute an obligation, on the part of the Lender, to waive any provision of this Agreement under any circumstances. The assessment of any such fee in any particular circumstance shall not constitute the Lender’s waiver of any breach of this Agreement on account of which such fee was assessed nor a course of action on which the Borrower may rely.

                           (h)        The Borrower shall not be entitled to any credit, rebate or repayment of any Annual Facility Fee, Commitment Fee, Unused Line Fee or other fee previously earned by the Lender pursuant to this Section notwithstanding any termination of this Agreement or suspension or termination of the Lender’s obligation to make loans and advances hereunder.

             1-10.     Lender’s Discretion.

                           (a)         Each reference in the Loan Documents to the exercise of discretion or the like by the Lender shall be to the Lender’s exercise of its judgement, in good faith (which shall be presumed), based upon the Lender’s consideration of any such factor as the Lender, taking into account information of which that Lender then has actual knowledge, believes:

                                        (i)          Will or reasonably could be expected to affect the value of the Collateral, the enforceability of the Lender’s security and collateral interests therein, or the amount which the Lender would likely realize therefrom (taking into account delays which may possibly be encountered in the Lender’s realizing upon the Collateral and likely Costs of Collection).

                                        (ii)         Indicates that any report or financial information delivered to the Lender by or on behalf of the Borrowers is incomplete, inaccurate, or misleading in any material manner or was not prepared in accordance with the requirements of this Agreement.

                                        (iii)        Suggests an increase in the likelihood that any of the Borrower will become the subject of a bankruptcy or insolvency proceeding.

                                        (iv)       Constitutes a Suspension Event.

and Borrower agrees that any exercise of discretion based upon the foregoing shall be deemed commercially reasonable.

                           (b)        In the exercise of such judgement, the Lender also may take into account any of the following factors the existence of which shall be deemed a commercial reasonable basis upon which Lender may exercise its discretion:

                                        (i)          Those included in, or tested by, the definitions of “Eligible Credit Card Receivables”, “Eligible Inventory”, “Retail”,  and “Cost”.

                                        (ii)         The current financial and business climate of the industry in which any of the Borrowers competes (having regard for the Borrower’s position in that industry).

                                        (iii)        General economic conditions which have a material effect on cost structure.

                                        (iv)       Material changes in or to the mix of Paper Warehouse’s Inventory.

                                        (v)        Seasonality with respect to Paper Warehouse’s Inventory and pattern of Paper Warehouse’s  retail sales versus that which was projected, and

                                        (vi)       Material changes in Availability versus that which was projected.

                                        (vii)      Such other factors as the Lender determines as having a material bearing on credit risks associated with the providing of loans and financial accommodations to the Borrowers.

                           (c)         The burden of establishing the failure of the Lender to have acted in a commercially reasonable manner in Lender’s exercise of discretion shall be the Borrowers’.

             1-11.     Fees for L/C’s.

                           (a)         Borrowers shall pay to the Lender a fee payable monthly in arrears; for each outstanding L/C at the rate of one (1.0%) percent per anum of the Stated Amount of that L/C.

                           (b)        In addition to the fee to be paid as provided in Subsection 1-11(a), above, the Borrowers shall pay to the Lender (or to the Issuer, if so requested by the Lender), on demand, all issuance, processing, negotiation, amendment, and administrative fees and other amounts charged by the Issuer on account of, or in respect to, any L/C, provided that such fee is not duplicative of the fee paid to Lender in accordance with Section 1-11(a) above.

             1-12.     Concerning L/C’s.

                           (a)         None of the Issuer, the Issuer’s correspondents, or any advising, negotiating, or paying bank with respect to any L/C shall be responsible in any way for:

                                        (i)          The performance by any beneficiary under any L/C of that beneficiary’s obligations to the Borrowers.

                                        (ii)         The form, sufficiency, correctness, genuineness, authority of any person signing; falsification; or the legal effect of; any documents called for under any L/C if such documents on their face appear to be in order.

                           (b)        The Issuer may honor, as complying with the terms of any L/C and of any drawing thereunder, any drafts or other documents otherwise in order, but signed or issued by an administrator, executor, conservator, trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver, or other legal representative of the party authorized under such L/C to draw or issue such drafts or other documents.

                           (c)         Unless otherwise agreed to, in the particular instance, the Borrowers hereby authorize any Issuer to:

                                        (i)          Select an advising bank, if any.

                                        (ii)         Select a paying bank, if any.

                                        (iii)        Select a negotiating bank.

                           (d)        All directions, correspondence, and funds transfers relating to any L/C are at the risk of the Borrowers. The Issuer shall have discharged the Issuer’s obligations under any L/C which, or the drawing under which, includes payment instructions, by the initiation of the method of payment called for in, and in accordance with, such instructions (or by any other commercially reasonable and comparable method). Neither the Lender (to the extent not caused by Lender’s gross negligence or willful misconduct) nor the Issuer shall have any responsibility for any inaccuracy, interruption, error, or delay in transmission or delivery by post, telegraph or cable, or for any inaccuracy of translation.

                           (e)         The Lender’s and the Issuer’s rights, powers, privileges and immunities specified in or arising under this Agreement are in addition to any heretofore or at any time hereafter otherwise created or arising, whether by statute or rule of law or contract.

                           (f)         Except to the extent otherwise expressly provided hereunder or agreed to in writing by the Issuer and the Borrowers, the L/C will be governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No.500, and any subsequent revisions thereof.

                           (g)        If any change in any law, executive order or regulation, or any directive of any administrative or governmental authority (whether or not having the force of law), or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof, shall either:

                                        (i)          Impose, modify or deem applicable any reserve, special deposit or similar requirements against letters of credit heretofore or hereafter issued by any Issuer or with respect to which the Lender or any Issuer has an obligation to lend to fund drawings under any L/C.

                                        (ii)         Impose on any Issuer any other condition or requirements relating to any such letters of credit; and the result of any event referred to in Section 1-12(g)(i) above, shall be to increase the cost to any Issuer of issuing or maintaining any L/C (which increase in cost shall be the result of such Issuer’s reasonable allocation among that Issuer’s letter of credit customers of the aggregate of such cost increases resulting from such events), then, upon demand by the Lender and delivery by the Lender to the Borrowers of a certificate of an officer of the subject Issuer describing such change in law, executive order, regulation, directive, or interpretation thereof, its effect on such Issuer, and the basis for determining such increased costs and their allocation, the Borrowers shall immediately pay to the Lender for payment to the Issuer, from time to time as specified by the Lender, such amounts as shall be sufficient to compensate such Issuer for such increased cost. Any Issuer’s determination of costs incurred under Section 1-12(g)(i), above, and the allocation, if any, of such costs among the Borrowers and other letter of credit customers of such Issuer, if done in good faith and made on an equitable basis and in accordance with the officer’s certificate, shall be conclusive and binding on the Borrowers.

                           (h)        The obligations of the Borrowers under this Agreement with respect to L/C’s are absolute, unconditional, and irrevocable and shall be performed strictly in accordance with the terms hereof under all circumstances whatsoever including, without limitation, the following:

                                        (i)          Any lack of validity or enforceability or restriction, restraint, or stay in the enforcement of this Agreement, any L/C, or any other agreement or instrument relating thereto.

                                        (ii)         Any amendment or waiver of, or consent to the departure from, any L/C.

                                        (iii)        The existence of any claim, set-off, defense, or other right which the Borrowers may have at any time against the beneficiary of any L/C.

                                        (iv)       Any honoring of a drawing under any L/C, which drawing possibly could have been dishonored based upon a strict construction of the terms of the L/C.

                                        (v)        The Borrowers shall not present to Lender or cause the amendment of an L/C without satisfactory evidence of one or more of the following: (a) change in delivery date; (b) Borrowers’ receipt of partial shipment; or (c) change to original order reflected in OTB (open to Buy) or other information which may be so reasonably requested by the Lender.

                           (i)          In no event, shall Lender or Issuer have any obligation to honor any L/C presented for payment after its expiration.  In the event no payment has been made, the Stated Amount of such L/C shall continue to be deducted from Availability for thirty (30) business days beyond expiration of said L/C, unless such L/C has been previously cancelled or terminated and Lender has received reasonably satisfactory written evidence of such termination or cancellation.

ARTICLE 2 - GRANT OF SECURITY INTEREST

             2-1.       Grant of Security Interest. To secure the Borrowers prompt, punctual, and faithful performance of all and each of the Liabilities, the Borrowers hereby grant to the Lender a continuing security interest in and to, and assigns to the Lender, all assets and property, including, without limitation, the following, and each item thereof, whether now owned or now due, or in which any of the Borrowers has an interest, or hereafter acquired, arising, or to become due, or in which the Borrowers obtain an interest (all of which, together with any other property in which the Lender may in the future be granted a security interest, is referred to herein as the “Collateral”):

                           (a)         All Inventory.

                           (b)        All Accounts, accounts receivable, contracts, contract rights, notes, bills, drafts, acceptances, General Intangibles (excluding only the Richfield Account but such exclusion terminates upon the termination of the Richfield Account and any obligations owed to Borrowers thereunder shall be deemed part of the Collateral), Instruments, including Promissory Notes, Documents, Documents of Title, Chattel Paper, securities, Security Entitlements, Security Accounts, Investment Property, Deposit Accounts, Letter of Credit Rights, Supporting Obligations, choses in action, and all other debts, obligations and liabilities in whatever form, owing to Borrowers from any Person, firm or corporation or any other legal entity, whether now existing or hereafter arising, now or hereafter received by or belonging or owing to Borrowers, for goods sold by it or for services rendered by it, or however otherwise established or created, all guarantees and securities therefor, all right, title and interest of Borrowers in the merchandise or services which gave rise thereto, including the rights of reclamation and stoppage in transit, all rights to replevy goods, and all rights of an unpaid seller of merchandise or services.

                           (c)         All machinery, Equipment, Fixtures and other Goods, whether now owned or hereafter acquired by any Borrower and wherever located, all replacements and substitutions therefor or accessions thereto and all proceeds thereof, but excluding motor vehicles and excluding Equipment subject to any Capital Lease whichexpressly prohibits the granting of a lien and is identified on EXHIBIT 2-1(c) but such exclusion for Equipment subject to any such Capital Lease identified on EXHIBIT 2-1(c) shall terminate if such Capital Lease is not renewed and terminates and such Equipment shall thereupon be deemed Collateral hereunder.

                           (d)        Leasehold Interests and rights of occupancy.

                           (e)         Real Estate, except the Real Estate owned by Paper Warehouse located at Excelsior Boulevard, Minneapolis, Minnesota.

                           (f)         All proceeds, products, substitutions and accessions of or to any of the foregoing in any form, including, without limitation, all proceeds, refunds and premium rebates of credit, fire or other insurance covering the Collateral, and also including, without limitation, rents and profits resulting from the temporary use of any of the foregoing.

             2-2.       Deposit Accounts.  For each Deposit Account that any Borrower at any time opens or maintains, Borrower shall, at Lender’s request and option, pursuant to an agreement in form and substance satisfactory to Lender, either (a) cause the depositary Lender to agree to comply at any time with instructions from Lender to such depositary Lender directing the disposition of funds from time to time credited to such Deposit Account, without further consent of Borrower, or (b) arrange for Lender to become the customer of the depositary Lender with respect to the Deposit Account, with Borrower being permitted, only with the consent of Lender, to exercise rights to withdraw funds from such deposit account.

             2-3.       Collateral in the Possession of a Bailee.  If any goods of any Borrower are at any time in the possession of a bailee, Borrower shall promptly notify Lender thereof and, if requested by Lender, shall promptly obtain an acknowledgment from the bailee, in form and substance satisfactory to Lender, that the bailee holds such Collateral for the benefit of Lender and shall act upon the instructions of Lender, without the further consent of Borrower.

             2-4        Letter of Credit Rights.  If any Borrower is at any time a beneficiary under a letter of credit now or hereafter issued in favor of Borrower, Borrower shall promptly notify Lender thereof and, at the request and option of Lender, Borrower shall, pursuant to an agreement in form and substance satisfactory to Lender, either (a) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to Lender of the proceeds of any drawing under the letter of credit, or (b) arrange for Lender to become the transferee beneficiary of the letter of credit, with Lender agreeing, in each case, that the proceeds of any drawing under the letter of credit are to be applied  in the same manner as any other payment on an Account.

             2-5.       Commercial Tort Claims.  If any Borrower shall at any time hold or acquire a commercial tort claim, Borrower shall immediately notify Lender in a writing signed by Borrower of the brief details thereof and grant to Lender in such writing a security interest therein, and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Lender.

             2-6.       Authorization to File Financing Statements.  Borrowers hereby irrevocably authorize Lender at any time and from time to time to file in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as “all assets” of Borrower (subject to the limitations set forth in Sections 2-1 (b), (c) and (e) above) or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by the Uniform Commercial Code for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether any Borrower is an organization, the type of organization and any organization identification number issued to any Borrower, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted Collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. Borrowers agree to furnish any such information to Lender promptly upon request.  Borrowers also ratify any authorization for Lender to have filed in any Uniform Commercial Code jurisdiction any like initial financing statements or amendments thereto if filed prior to the date hereof.

             2-7.       Extent and Duration of Security Interest. This grant of a security interest is in addition to, and supplemental of, any security interest previously granted by the Borrowers to the Lender and shall continue in full force and effect applicable to all Liabilities until all Liabilities have been paid and/or satisfied in full and the security interest granted herein is specifically terminated in writing by a duly authorized officer of the Lender.

ARTICLE 3 - DEFINITIONS

             All capitalized terms used in this agreement which are not otherwise defined herein or in the UCC shall have the meanings assigned to them in EXHIBIT 3, annexed hereto.

ARTICLE 4 - CONDITIONS PRECEDENT

             The effectiveness of this Agreement, the establishment of the Revolving Credit, and the making of the first loan under the Revolving Credit, is conditioned upon the delivery to Lender of the documents described below, each in form and substance satisfactory to the Lender, and the satisfaction of the conditions described below:

             4-1.       Corporate Due Diligence.

                           (a)         A Certificate of legal existence and good standing issued by the Secretary of State or other governing authority of the State where each Borrower is a Registered Organization.

                           (b)        Certificates of due qualification and good standing, issued by the Secretary(ies) of State or other governing authority of each state in which the nature of the   business conducted by any  Borrower or assets owned could require such qualification and the failure to be so qualified could have a material adverse effect on the business, operations or rights of any such Borrower.

                           (c)         A Certificate of each Borrower’s secretary, clerk or otherwise authorized officer or other Person attesting to the due adoption, continued effectiveness, and setting forth the texts of, each resolution or authorization adopted in connection with the establishment of the loan arrangement contemplated by the Loan Documents and attesting to the true signatures of each Person authorized as a signatory to any of the Loan Documents.

             4-2.       Opinion. An opinion of counsel to each of the Borrowers in form and substance satisfactory to Lender and Lender’s counsel.

             4-3.       Cash Management, Control Agreements and Additional Documents. Such additional instruments and documents including, without limitation, an agreement for the Blocked Account(s) executed by the Borrowers, Lender and the applicable bank, agreements with each Borrower’s credit card processors and/or other credit service providers executed by the Borrower, Lender and each such processor or service provider, and any other notices or agreements required under Article 7 hereof and any other document to provide Lender with control with respect to collateral consisting of Deposit Accounts, Investment Property, Letter of Credit Rights and Electronic Chattel Paper as the Lender or its counsel reasonably may require or request, in each case in form and substance satisfactory to Lender and its counsel, and all other Loan Documents, including without limitation, guaranties, pledges and security agreements from all affiliates and subordination and intercreditor agreements from all holders of debt not to be paid from proceeds hereunder, all in form and substance satisfactory to Lender and its counsel.

             4-4.       Key Life Policies.  The Collateral Assignment to the Lender of policies on the lives of the following for the amounts stated:

                                        Yale Dolginow:                                        $800,000

             4-5.       Officers’ Certificates. Certificates executed by the president or chief executive officer and the chief financial officer of each Borrower and stating that the representations and warranties made by the Borrowers to the Lender in the Loan Documents are true and complete as of the date of such Certificate, and that no event has occurred which is or which, solely with the giving of notice or passage of time (or both) would be an Event of Default.

             4-6.       Representations and Warranties.  Each of the representations made by or on behalf of the Borrowers in this Agreement or in any of the other Loan Documents or in any other report,  statement, document, or paper provided by and or on behalf of the Borrowers shall be true and complete as of the date as of which such representation or warranty was made.

             4-7.       Initial Minimum Excess Availability.  Availability, after giving effect to the first loans and advances to be made under the Revolving Credit; any charges to the Loan Account made in connection with the establishment of the credit facility contemplated hereby; and L/C’s to be issued at, or immediately subsequent to, the establishment of such Revolving Credit, is not less than Two Million  ($2,000,000) Dollars.

             4-8.       No Event of Default. No event shall have occurred, or failed to occur, which occurrence or which failure constitutes, or which, solely with the passage of time or the giving of notice (or both) would constitute, an Event of Default.

             4-9.       .No Material Adverse Change.  No Material Adverse Change has occurred.

             4-10.     Delivery of Warrants.  Intentionally deleted.

             4-11.     Landlord Waivers and “Access Agreements’’.  Such agreements from landlords and warehousemen, bailees and any other third parties who may control any premises upon which any of the Collateral is located as Lender may in its discretion require in form and substance satisfactory to Lender.

             4-12.     Delivery of Documents.   No document shall be deemed delivered to the Lender until received and accepted by the Lender at its head offices in Boston, Massachusetts or at the offices of Lender’s counsel. Under no circumstances will this Agreement take effect until executed and accepted by the Lender at said head office or at the offices of Lender’s counsel.  In the event that Lender agrees, at Borrower’s request, to make the initial advance or any subsequent advance hereunder, prior to Borrowers’ delivery of any documents required under this Article 4 or otherwise by this Agreement or the date required under any “open items” letter executed in connection therewith, an additional fee, equal to the greater of one-tenth of one (0.1%) percent of the then outstanding amount of the Loan Account or Five Hundred ($500) Dollars shall be payable weekly on the next Thursday following the date by which such documents are due until such time as all such documents are provided, subject to pro-ration in the event that documents are delivered after such due date, but prior to such following Thursday

ARTICLE 5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS

             To induce the Lender to establish the loan arrangement contemplated herein and to make loans and Advances and to provide financial accommodations under the Revolving Credit (each of which loans and Advances shall be deemed to have been made in reliance thereupon) each Borrower, in addition to all other representations, warranties, and covenants made by the Borrowers in any other Loan Document, makes those representations, warranties, and covenants included in this Agreement.

             5-1.       Payment and Performance of Liabilities. The Borrowers shall pay each Liability due Lender when due (or when demanded if payable on demand) and shall promptly, punctually, and faithfully perform each other Liability due Lender and, except to the extent such other obligations are being contested in good faith, adequate reserves for same are maintained in accordance with GAAP and Borrower has provided Lender notice of same in accordance herewith, pay each obligation due others in accordance with its current custom and practice.  If any Borrower has any dispute with any Person with respect to any Liability or other material obligation, such Borrower shall give Lender notice of said dispute.

             5-2.       Due Organization - Authorization - No Conflicts.

                           (a)         Each Borrower presently is and shall hereafter remain in good standing as a, Minnesota corporation, a Registered Organization in the state of Minnesota, which is the state in which it is legally formed, and Borrower shall not change such state of legal formation and is and shall hereafter remain duly qualified and in good standing in every other state in which, by reason of the nature or location of the Borrowers’ assets or operation of the Borrower’s businesses, such qualification may be necessary and the failure to be so qualified could have a material adverse effect on the business operations or rights of any such Borrower

                           (b)        Each Borrower’s legal name is as set forth in the introduction to this agreement and none of the Borrowers shall change its legal name.

                           (c)         Each Related Entity (other than another Borrower, Yale Dolginow, or any director of any of the Borrowers) is listed on EXHIBIT 5-2, annexed hereto. Each such Related Entity is and shall hereafter remain in good standing in the state in which legally formed  and is and shall hereafter remain duly qualified in every other state in which, by reason of the nature and location of that entity’s assets or the operation of such entity’s business, such qualification may be necessary and the failure to be so qualified could have a material adverse effect on the business operations or rights of any such Borrower. The Borrowers shall provide the Lender with prior written notice of any such entity’s becoming or ceasing to be a Related Entity.

                           (d)        Each Borrower has all legal corporate power and authority to execute and deliver all and each of the Loan Documents to which each Borrower is a party and has and will hereafter retain all requisite legal power and authority to perform any and all of the Liabilities.

                           (e)         The execution and delivery by each Borrower of each Loan Document to which it is a party; each Borrower’s consummation of the transactions contemplated by such Loan Documents (including, without limitation, the creation of security interests by the Borrower as contemplated hereby); each Borrower’s performance under those of the Loan Documents to which it is a party; the borrowings hereunder; the use of the proceeds thereof and the exercise of any of Lender’s remedies thereunder:

                                        (i)          Have been duly authorized by all necessary legal action.

                                        (ii)         Do not, and will not, contravene in any material respect any provision of any Requirement of Law or obligation of any Borrower.

                                        (iii)        Will not result in the creation or imposition of, or the obligation to create or impose, any Encumbrance upon any assets of any Borrower pursuant to any Requirement of Law or obligation, except pursuant to the Loan Documents.

                                        (vi)       Will not violate any provisions of any of the Franchise Agreements

                           (f)         The Loan Documents to which each Borrower is a party have been duly executed and delivered by each such Borrower and are the legal, valid and binding, and joint and several obligations of such Borrower, enforceable against the Borrowers in accordance with their respective terms.

                           (g)        PWFI and PartySmart are each wholly owned subsidiaries of Paper Warehouse.

             5-3.       Trade Names.

                           (a)         EXHIBIT 5-3, annexed hereto, is a listing as of the Closing Date of:

                                        (i)          All names under which each Borrower ever conducted its business, all trademark and service mark registrations and applications with respect to any trademark or service mark; and all licenses pursuant to which each Borrower has the right to use any trademark or service mark.

                                        (ii)         All entities and/or Persons with whom any Borrower ever consolidated or merged, or from whom any Borrower ever acquired in a single transaction or in a series of related transactions substantially all of Person’s assets.

                           (b)        Except (i) upon not less than twenty-one (21) days prior written notice given the Lender which notice shall include a proposed revised Exhibit 5-3, and (ii) in compliance with all other provisions of this Agreement, none of the Borrowers will undertake or commit to undertake any action such that the results of that action, if undertaken prior to the date of this Agreement, would have been reflected on EXHIBIT 5-3.

                           (c)         Each Borrower owns and possesses, or has the right to use all patents, industrial designs, trademarks, trade names, trade styles, brand names, service marks, logos, copyrights, trade secrets, know-how, confidential information, and other intellectual or proprietary property of any third Person necessary for the Borrower’ conduct of its business.

                           (d)        The conduct by each Borrower and any other Persons party to any Franchise Agreement of its business in accordance with such Franchise Agreement does not infringe on the patents, industrial designs, trademarks, trade names, trade styles, brand names, service marks, logos, copyrights, trade secrets, know-how, confidential information, or other intellectual or proprietary property of any third Person.

             5-4.       Location, Landlord’s Consents, Waivers.

                           (a)         The Collateral, and the books, records, and papers of Borrowers pertaining thereto, are kept and maintained solely at the Borrowers’ chief executive offices as set forth at the beginning of this Agreement and at those locations which are listed on EXHIBIT 5-4, annexed hereto, which exhibit includes all service bureaus with which any such records are maintained and the names and addresses of each of the Borrowers’ landlords. Except (i) to accomplish sales of Inventory in the ordinary course of business or (ii) to utilize such of the Collateral as is removed from such locations in the ordinary course of business, the Borrowers shall not remove any Collateral from said chief executive offices or those locations listed on EXHIBIT 5-4, provided however, in the event that any Borrower enters into a new Lease for executive offices and/or for new store locations in accordance with section 5-4 (e) below, provides Lender with a proposed revised EXHIBIT 5-4 identifying such new executive offices and/or store locations within the applicable notice period and there has not occurred any Event of Default which has not been remedied within any grace period expressly provided herein or otherwise waived in writing by Lender, Borrower may move Collateral to such new executive offices and/or store locations.

                           (b)        The Borrower shall obtain and deliver to the Lender a consent, waiver and subordination agreement executed by the landlords for all of Borrowers’ warehouse and distribution center locations, all store locations located in a Landlord Lien State or One-Turn State, upon or before the Closing Date, and shall use its commercially reasonable efforts to obtain such consent waiver and subordination agreement for the balance of Paper Warehouse store locations within sixty (60) days of the Closing Date with respect to stores listed in EXHIBIT 5-4 and with respect to any new stores opened in accordance with Section 5-4(e)(ii) prior to opening such new store, provided however, any failure of the Borrower to deliver Landlord Waivers  after having used such commercially reasonable efforts, shall not be deemed an Event of Default hereunder, but shall entitle Lender to establish Availability Reserves in accordance with Section 5-4(c) below

                           (c)         Lender may at any time after thirty (30) days after the Closing Date, in its discretion, establish an Availability Reserve for up to sixty (60) days rent for each of the Borrowers’ locations in a Landlord Lien State or in a One Turn State for which a satisfactory consent, waiver and subordination has not been received.  Such Availability Reserve may be reduced or eliminated but only if no Suspension Event is then in existence or has not theretofore occurred, upon the furnishing to the Lender of a consent, waiver and subordination agreement executed by the landlord for the subject location.

                           (d)        Without duplication of any Availability Reserve described above, the Lender may establish an Availability Reserve for past due rent.

                           (e)         No Borrower shall:

                                        (i)          Alter, modify, or amend any Lease, except for such Borrower’s benefit and except for renewals of Leases which renewals are on terms substantially similar to terms in effect as of the Closing Date and with at least ten (10) days prior written notice to Lender.

                                        (ii)         Commit to, or open or close any location at which the Borrower maintains, offers for sale, or stores any of the Collateral, except (x) Borrower may open up to five (5) locations per year but only to the extent provided in the Business Plan, approved by Borrower’s Board of Directors and with at least fifteen (15) days prior written notice to Lender and (y) Borrower may close up to ten (10)  locations per year but only to the extent provided for in the Business Plan, as approved by Borrower’s Board of Directors, with at least thirty (30) days prior written notice to Lender, and, if Borrower determines to employ an agent to effect any such closings, whether on a guarantee or fee basis or otherwise, subject to bidding procedures and an agreement acceptable to the Lender.

                           (f)         Except as otherwise disclosed on EXHIBIT 5-4, no tangible personal property of any  Borrower is in the care or custody of any third party or stored or entrusted with a bailee or other third party and none shall hereafter be placed under such care, custody, storage, or entrustment.  Borrower shall obtain and deliver a consent, waiver and subordination (in form reasonably satisfactory to the Lender) from each bailee disclosed on EXHIBIT 5-4 on or prior to the date of execution hereof.

             5-5.       Title to Assets.

                           (a)         The Borrowers are, and shall hereafter remain, the owners of the Collateral free and clear of all Encumbrances with the exceptions of the following:

                                        (i)          The security interest created herein.

                                        (ii)         Those Encumbrances (if any) listed on EXHIBIT 5-5, annexed hereto.

                                        (iii)        Encumbrances in favor of lessors under future Capital Leases permitted under section 5-6 (c) hereof provided, that (a) any such Encumbrances attach to such the subject property concurrently with or within 20 days after the acquisition thereof, (b) such Encumbrances attach solely to the property so acquired in such transaction, and  (c) the principal amount of the debt secured thereby does not exceed 100% of the Cost of such property.

                           (b)        The Borrowers do not and shall not have possession of any property on consignment to any Borrower.

             5-6.       Indebtedness.  The Borrowers do not and shall not hereafter have any Indebtedness with the exceptions of:

                           (a)         Any Indebtedness to the Lender.

                           (b)        The Indebtedness listed on EXHIBIT 5-6.

                           (c)         Indebtedness of any Borrower under any future Capital Leases not listed on EXHIBIT 5-6, not to exceed aggregate annual payments of One Million ($1,000,000) Dollars per year, provided that (i) Lender is given prompt written notice of any Capital Lease, such notice to include a proposed revised EXHIBIT 5-6 and a summary of each such proposed Capital Lease (ii) such Capital Leases permit the Lender to maintain a junior lien on the subject Equipment and provides for lessor’s consent to Lender’s use of such equipment in accordance with Section 11 hereof, subject to Lender’s maintenance of lease payments (such conditions be acknowledged substantially in the form attached hereto as EXHBIT 5-6(c)); (iii) no lien on the Collateral (other than a lien on the subject Equipment) arises as a result thereof and (iv) there has not occurred Event of Default which has not been remedied within any grace period expressly provided herein or otherwise waived in writing by Lender.