Site Selection and Locations

     Site Selection. We locate our stores in or near visible high traffic strip mall centers in close proximity to prominent mass merchandisers, discount or grocery store anchors. Our strategy of clustering stores in metropolitan markets promotes customer convenience and creates favorable economies of scale for marketing and advertising, operations and merchandising. In order to select the optimal location for our stores, we use a site selection process that considers various criteria, including:

	•		population density, and various demographics, including age and income;
	•		parking availability, storefront visibility and presence;
	•		local competition, traffic counts and lease rates.

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Locations. As of January 31, 2003, we had 86 Company-owned stores in the following states:

Merchandising

     Overview. In our 8,500 square foot prototype store, we offer a selection of approximately 12,000 everyday items, in addition to seasonal items, for a total of over 19,000 individual items. This broad array of goods makes us the one stop party goods shop for our customers. The store is organized by party themes and product classifications including: party supplies, gift-wrap items, catering/food service supplies, and greeting cards. The merchandise organization and our broad selections encourage impulse purchasing by our customers.

     Party Supplies. We offer an extensive selection of regular and seasonal merchandise in the following categories:

     Every day we offer more than 130 tableware patterns ranging in design from licensed characters to florals to themes to wedding.

     Gift Wrap. We offer a wide assortment of everyday and seasonal gift-wrap products. Our wide variety of colors and patterns in gift-wrap, gift bags, gift boxes, tissue paper, ribbons, bows, and gift tags ensures that all of our customers gift-wrap needs will be satisfied. We offer a complete selection of wrap supplies for holidays and special occasions such as birthdays, graduations, weddings, anniversaries and baby showers.

     Greeting Cards. We offer a full selection of special occasion, seasonal and everyday greeting cards under the Ambassador brand of Hallmark, which are sold at 50% off the list price everyday.

     Catering Food Service. We offer a full selection of food service products such as, plates, cups, trays, bowls, utensils and table coverings. These goods are available to certain customers such as businesses, caterers, non-profits and schools in bulk, at special organizational discounts.

     Competitive Pricing. We provide the customer with paper goods and party supplies at everyday competitive prices, augmented by extensive advertising.

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Product Sourcing and Inventory Management

     We purchased everyday and seasonal merchandise from approximately 160 suppliers during fiscal 2002. During fiscal 2002, our largest supplier accounted for approximately 24% of our purchases and our 4 largest suppliers represented approximately 60% of our purchases. We have a multi-year exclusive supply agreement with a supplier of greeting cards for our Company-owned and franchise stores. During fiscal 2002, in order to assist us with our liquidity needs, this supplier provided our senior lender with a letter of credit that supported an overline with our bank. As consideration for issuing the letter of credit, we renegotiated our supply agreement with this supplier during fiscal 2002, thereby increasing our purchase commitments and revising the agreement to include party supplies. We have a remaining contractual obligation for chain-wide purchases of $64.3 million of greeting cards, gift-wrap and party supplies. We estimate that these purchase commitments will be fulfilled over a 7-year period. With the exception of the agreement with the above-mentioned supplier, we do not have any long-term purchase commitments or exclusive contracts with any of our other suppliers. Aside from greeting cards and licensed products, we believe that alternative sources of product are available. These alternate products, however, may not be available at comparable prices, or we may have to source these products from smaller vendors that may not have the financial capacity to provide us with credit terms. In addition, having to re-source alternative vendors could prove disruptive to our business and could cause additional financial constraints. We consider numerous factors in supplier selection, including price, payment terms, product offerings and product quality. We negotiate pricing with suppliers on behalf of all Company-owned and franchise stores. We believe that this buying power enables us 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 our negotiated pricing terms. As we add new stores, we believe we will increase the volume of our inventory purchases and benefit further from increased discounts, trade allowances and more favorable payment terms from our suppliers.

     Approximately 95% of our everyday merchandise is shipped directly from the supplier to our stores. 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. We believe that we realize substantial savings by not maintaining a large central distribution system.

     Some of our suppliers, such as overseas suppliers, will not ship directly to our stores, but will instead ship products directly to one store in each of our major metropolitan markets. This store then separates and ships the products to our other stores within that market. This approach allows us to make opportunistic volume purchases and allows us to carry products not available from domestic suppliers. We utilize some of the stores in our markets for the separation and redistribution of products to other stores within that market. Up until the fourth quarter of fiscal 2002, we maintained a relatively small cross-dock facility in Minneapolis, Minnesota from which we separated and distributed seasonal merchandise system-wide, including to our franchise stores. In an effort to reduce costs, during the fourth quarter of fiscal 2002, management made the decision to close the Minnesota cross-dock facility and to actively try and sublet the location. Going forward, we will utilize a third-party for the distribution of product. We believe that we will realize cost savings in future years by using a third-party to distribute our product.

Advertising and Marketing

     We run aggressive advertising and marketing programs. Our real estate strategy of clustering stores in metropolitan markets enables us to maximize our marketing dollars through cost efficient media purchasing. We advertise in newspaper inserts, direct mail, and radio. We augment this external media with internal elements such as aggressive in/on store signage, store specific direct mail pieces, coupon books and party planning guides.

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     Our advertising focuses on a price-per-item, and is designed to show value and create customer urgency during the ad period. Our advertising consists of 4 color inserts primarily designed for, and run, during major seasonal and holiday times. In fiscal 2002 we ran 16 major promotional events in all of our markets. During major sales periods and events, radio augments our print advertising. During fiscal 2002, we spent approximately 65% of our marketing budget on print media, 25% on broadcast media and the balance on yellow pages, in store events and signage.

     We have targeted specific customer groups for direct marketing efforts. We recognize that there are many reasons for parties and special celebratory events, and we target our marketing efforts to those varied reasons. We have programs that target upcoming weddings, graduations, and children’s birthdays, as well as institutional/food service customers. Special discounts of 15% are available to certain institutional customers.

     In fiscal 2003, we are enhancing our advertising and in-store marketing programs by:

	•		adding to our insert program with additional advertising in Sunday papers in selected markets;
	•		emphasizing key categories, such as balloons and discounted greeting cards, that provide store differentiation for us in every ad;
	•		featuring “value” ensembles, which retail under $1.00 in most ads;
	•		implementing a new, customer-friendly signing package in every store; and
	•		using “Great Prices” and “Celebration” as consistent marketing themes in our ads and in our stores.

Information Systems

     We believe that a strong information systems infrastructure is essential to our current operations and is critical towards enhancing our competitive position in our industry. We have invested significantly in building this infrastructure. Our current system provides daily sales information and inventory levels at store, department, class, and product level. This information allows the corporate office to monitor daily sales, gross profit, repricing and inventory by product across the entire store base. Also, our automatic merchandise replenishment system uses this information to reorder goods for individual stores based on specific product requirements.

     During fiscal 2002 we completed the implementation of time and attendance software, which provides better tracking, accuracy, and analysis of store labor hours. In fiscal 2002 we also completed a major upgrade to our merchandising system, which will allow the company to react more quickly to sales trends, by looking at detailed information at a weekly level, instead monthly. We have added an enhancement to our “POS Smart” system, which is our back-office computer system, to allow the stores to print receiving documents at their store, instead of mailing or faxing the documents. The implementation of our financial planning system is nearly complete. This system should facilitate better planning and forecasting by the company and faster communication of financial results to upper management. During fiscal 2003 we will finalize the implementation of the financial planning system, and we will turn on additional functionality in our “POS Smart” system to improve accuracy in receiving and transferring of merchandise.

Internet and e-commerce

     In order to augment our store sales and strengthen our name recognition, we developed a website, PartySmart.com, to sell party supplies and paper goods over the Internet. We believe this site is an additional distribution channel for consumers who want to purchase party or theme products on-line, and it is an

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information tool for consumers who want party planning advice or who want to identify the nearest Paper Warehouse or Party Universe location. On this site, we offer everyday party goods for parties and celebrations such as baby showers, birthdays, theme parties and anniversaries. In addition, the site is regularly updated with unique themes and product offerings that match the current season, such as Halloween and Christmas.

     We believe that the Internet can be an important information tool and that our website has the potential to be a successful distribution channel for us. However, to date, revenues from our e-commerce site have been insignificant. We will continue to evaluate the website’s contributions to ensure that they are aligned with our overall goals and objectives. If we determine that our website is not meeting our objectives, at that time, we will determine alternative business solutions such as outsourcing the business with a strategic partner or possible sale of the site.

Franchising

     We have offered franchises of our Paper Warehouse store concept since October 1987. As of January 31, 2003, we had 39 franchisees operating 50 franchise stores in the following locations:

     We typically establish franchise stores in markets outside of metropolitan areas with Company-owned stores, as we believe that these markets are not usually served adequately by the party supplies and paper goods industry. In addition to generating franchise revenues, franchise stores benefit us through increased name recognition and increased buying power with our suppliers.

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     We assist franchisees in opening and operating a Paper Warehouse store. During the pre-opening phase, our support includes:

	•		site evaluation and assistance with lease negotiations;
	•		store build-out assistance;
	•		fixtures, equipment, supplies and inventory procurement;
	•		opening advertising materials; and
	•		operations training.

     We make available to our franchisees, services such as business planning, operations and promotional activities. In addition, we perform the merchandising process for our franchisees. We make periodic inspections of the franchise stores to ensure that the franchisee is complying with our various requirements and quality standards. We have considered, and may, in the future, enter into multiple store development agreements with franchisees granting 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.

     Our franchise revenues are comprised of initial franchise fees and continuing royalty payments. Our current initial franchise fee is typically $35,000 for new franchisees. We may offer a discounted franchise fee for developers opening multiple stores. If a franchisee enters into a second or third franchise agreement they will receive a discount on the initial fee associated with the second or third store. Franchisees are also required to pay us 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 us a continuing royalty of 5% of their 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. We reserve the right to require franchisees to pay a weekly advertising fee not to exceed 1% of gross sales, although to date we have not charged this fee. Each franchisee is granted a license from us for the right to use certain of our intellectual property rights, including the mark Paper Warehouse® or Party Universe® and related designs. Our franchise agreements are for a ten-year term and contain conditional renewal options.

Competition

     The party supplies and paper goods retailing business is highly competitive. In order to compete successfully against other party supplies and paper goods competition, we believe we must maintain convenient locations, broad merchandise selections, competitive pricing and strong customer service. Our stores compete with a variety of smaller and larger retailers, including:

	•		specialty party supply retailers;
	•		other party superstores such as Party City and Factory Card Outlet;
	•		card shops;
	•		designated departments in mass merchandisers, discount retailers, toy stores, drug stores, supermarkets and department stores; and
	•		other Internet retailers.

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     We believe the following factors distinguish our business from other party superstores:

	•		we have grown our number of stores in a more controlled manner;
	•		our clustering growth strategy creates a critical mass of stores in our principal markets, which allows us to promote customer convenience and create favorable economies of scale for marketing, advertising and operations; and
	•		we have a strong dedicated senior management team and board of directors with significant retail experience.

Trademarks and Service Marks

     We use the marks Paper Warehouse, Party Universe and Party Smart, all of which are federally registered. We are aware of the common law usage of the name Paper Warehouse by several companies in various parts of the United States, which may prevent us from using that name in certain regional markets. In new markets, or markets where we cannot use Paper Warehouse, we intend to use the name Party Universe. Because of our regional approach to advertising and store clustering, we believe that the use of a single trademark within each market is more important to our business strategy than the use of one mark nationally.

Seasonality and Seasonal Events

     We generate a significant amount of sales from our seasonal events, and we are significantly dependent on our seasonal events. We have three primary seasonal events and several secondary seasonal events. Our primary events are the Graduation season, Halloween and Christmas/Hanukkah. Our secondary seasonal events consist of Valentine’s Day, St. Patrick’s Day, Easter, Mother’s Day, Father’s Day, Fourth of July and New Year’s. In combination, these seasonal events represented approximately 22% of our annual sales volume for fiscal 2002.

Government Regulation

     As a franchisor, we comply with rules and regulations adopted by the Federal Trade Commission and with state laws that regulate the offer and sale of franchises. We also comply with a number of state laws that regulate certain substantive aspects of the franchisor-franchisee relationship. These laws regulate the franchise relationship, for example, by requiring the franchisor to deal with 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 kept us from seeking franchisees in any given area and have not affected our operations.

     All of our stores 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, we comply with the Fair Labor Standard Act and various state laws governing matters such as minimum wage, overtime and other working conditions. We also 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 31, 2003, we employed 305 full-time and 634 part-time employees. We consider our relationships with our employees to be good. None of our employees are covered by a collective bargaining agreement.

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     (d)  Financial Information About Geographic Areas.

     Since inception, with the exception of continuing franchise fees earned on our Canadian franchise’s retail sales equal to approximately $7,000 for fiscal 2002, all of our revenues have been derived from within the United States. In addition, since inception, all of our assets have been located in the United States.

     The Company has a web site at www.partysmart.com. The contents of the Company’s web site are not part of, nor are they incorporated by reference in this annual report. The Company does make available on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, or amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are also available on the SEC website at and www.SEC.gov the Company also provides paper copies of those reports free of charge upon request.

     Paper Warehouse makes written and oral statements from time to time, including statements contained in this Annual Report on Form 10-K regarding its business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, shareholders, investors, news organizations and others, and discussions with our management and other Company representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

     Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statements made by us or on our behalf speak only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. We do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by us or on our behalf.

     In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all of the important factors, include the following:

We Have Experienced Losses and May Not be Profitable

     We incurred a net loss of approximately $4.2 million for fiscal 2002. We incurred net losses of $9.8 million and $434,000 for fiscal 2001 and fiscal 2000, respectively. Our 2001 net loss reflects our decision to record a full valuation allowance against our deferred tax asset, equal to approximately $6.1 million, as prescribed by authoritative accounting guidance. In fiscal 2002, we increased our deferred tax asset and the

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corresponding valuation allowance by approximately $1.6 million and accordingly did not record a benefit for our losses. We cannot assure you that we will generate sufficient revenues or margins, or control operating expenses, to achieve or sustain profitability in future years, or to reverse the valuation allowance against our deferred tax asset.

Our Need to Raise Additional Capital to Fund Our Operations Is Immediate

     Based on our current cash position, our recent inability to generate cash from operations, and our need to purchase in advance inventory for our upcoming seasonal events, our need to raise cash to satisfy our working capital needs is immediate. We are actively pursuing opportunities to satisfy our cash needs through debt and equity financing. To date, however, we have not been successful in obtaining the funds needed and we may be unable to obtain funding to meet our immediate needs on terms acceptable to us or at all. If we are successful in raising additional equity financing, the terms of such financing will likely be dilutive to our existing shareholders. Failure to improve our cash position in a timely manner may prevent us from purchasing sufficient inventory for our upcoming seasonal events and may hinder our ability to pay our debts as they come due. In such case, we may seek, or be forced to seek protection under the bankruptcy laws.

Our Indebtedness Could Negatively Affect Our Financial Position or Our Continued Operations

     As of January 31, 2003, we had approximately $11.0 million of borrowings outstanding, which include amounts outstanding under our revolving line of credit, our subordinated debentures, our mortgage, capital leases and other miscellaneous debt. In addition, we have approximately $10.0 million of trade payables, of which approximately $4.6 million is due on June 30, 2003. We are more leveraged than some of our competitors, which might put us at a competitive disadvantage. The substantial level of our indebtedness could:

	•		impair our ability to obtain additional financing for operations, inventory, capital expenditures or general corporate purposes;
	•		cause a substantial portion of our cash flow from operations to be spent on principal and interest payments;
	•		affect our ability to fund our operations, including obtaining appropriate inventory levels;
	•		make us more vulnerable to economic or industry downturns and competitive pressures;
	•		prevent us from making interest and principal payments on our debt obligations as they come due;
	•		hinder our ability to adjust to changing market conditions; and
	•		prevent us from meeting certain financial tests contained in our debt obligations, which could lead to a default on those obligations.

     In the event that we cannot pay our debts as they come due, including the accounts payable that is due on June 30, 2003, we could either be forced into bankruptcy or we could be forced to seek the protection of the bankruptcy laws.

Our Annual Results Are Significantly Dependent on the Results of Our Seasonal Events

     We rely significantly upon our ability to generate sales from our primary and secondary seasonal events. Any factor that negatively affects our revenues or increases our operating expenses during our seasonal events could negatively affect our annual results of operations. For instance, we could spend a large amount to advertise these events and not generate sufficient sales. In addition, we commit to purchase inventory to support these events far in advance of the selling season. If we are not timely in these purchases or are unable to purchase the appropriate quantity, we could lose sales. Our seasonal sales are heavily

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augmented by sales in our solid color and institutional/food service product categories. A low sales performance for any of our seasonal categories could result in a high level of carryover product, or product that is packed away, for that season. Because we rely in part on proceeds from our seasonal events to purchase our inventory of everyday products, a high level of carryover could reduce the amount of money that we would have available to spend on our everyday product categories and, therefore, could negatively impact the sales results for our everyday product categories. Our fiscal quarters do not end on calendar quarters, and as a result of yearly changes to the retail calendar as well as various shifts in the calendar due to the timing of our seasonal events, our quarterly results may not be comparable year-over-year.

Competition May Reduce Our Revenues and Operating Income

     Increased competition by existing or future competitors may reduce our sales. As a result of competition from other specialty party supplies and paper goods retailers, as well as mass merchants, we have experienced reduced sales growth in our existing stores and incurred additional marketing and promotional expenses. Many of our competitors have substantially greater financial resources than we do. Some of our competitors have been, or may be, funded by certain members of the vendor community. We may also encounter additional competition from new entrants in the future in our existing markets.

Our Business Depends on Continued Good Relations with Our Suppliers

     During fiscal 2002, our largest supplier accounted for approximately 24% of our purchases. Our 4 largest suppliers represented approximately 60% of our purchases during fiscal 2002, and represent over 75% of the $4.6 million of trade payables on which we were granted extended payment terms until June 30, 2003. Our failure to maintain good relationships with our principal suppliers or the loss of our principal suppliers could hurt our business. Many of our principal suppliers currently provide us with credit terms on purchases and incentives such as volume purchasing allowances and trade discounts. If our suppliers were to discontinue providing us with credit terms on everyday and seasonal merchandise, a significant portion of our cash flow would have to be utilized to purchase merchandise in advance, which could affect our ability to fund our operations. If our suppliers were to reduce or discontinue these volume purchasing allowances and trade discounts, prices from our suppliers could increase, which could negatively impact our profitability. If we are unable to pay, or further restructure, the $4.6 million of trade payables by June 30, 2003, we could damage our relationships with our largest suppliers, and would have difficulty in replacing them. Any supplier could discontinue selling to us at any time.

A Failure in Executing Our Franchise Program May Negatively Impact our Revenue

     Our growth and success depends in part upon our ability to attract, contract with and retain qualified franchisees. It also depends upon the ability of those franchisees to successfully operate their stores and promote and develop the Paper Warehouse and Party Universe store concept. Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her store independently. Various laws limit our ability to influence the day-to-day operations of our franchise stores. We cannot assure you that franchisees will be able to successfully operate Paper Warehouse stores in a manner consistent with our concepts and standards. As a result, our franchisees may operate their stores in a manner that reduces the gross revenues of these stores, and therefore reduces our franchise revenues.

A Downturn in the Economy or a Change in Consumer Preferences Could Negatively Affect Our Business

     In general, our sales represent discretionary spending by consumers, which is affected by many factors such as general business conditions, interest rates, the availability of consumer credit, taxation, world events and consumer confidence in future economic conditions. Consumer demand for single-use, disposable party goods could decline during periods when disposable income is lower or during periods of actual or

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perceived unfavorable economic conditions. If cost increases in raw materials such as paper, plastic, cardboard or petroleum were to cause our 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 in favor of reusable products for environmental or other reasons could reduce the demand for our products. If this occurs, our revenues and profitability will decline. In addition, because our operations are located principally in less than ten metropolitan areas, we are subject to certain regional risks, such as the economy, weather conditions, natural disasters and government regulations. If any region in which we operate stores were to suffer an economic downturn or other adverse regional risks were to occur, our sales could decline.

We Need to Anticipate and Respond to Merchandising Trends

     Our success depends in part on our ability to anticipate and respond in a timely manner to changing merchandise trends and consumer demands. We make merchandising decisions well in advance of the seasons during which we will sell the merchandise. As a result, if we fail to identify and respond quickly to emerging trends, consumer acceptance of the merchandise in our stores could diminish, and we may experience a reduction in revenues. We sell certain licensed products that are in great demand for short time periods, making it difficult to project our inventory needs for these products. Significantly greater or less-than-projected product demand, could lead to one or more of the following:

	•		lost sales due to insufficient inventory;
	•		higher carrying costs associated with excess and/or slower turning inventory;
	•		higher levels of seasonal carryover merchandise; and
	•		reduced or eliminated margins due to markdowns on excess or slow moving inventory.

ITEM 2.      PROPERTIES.

     We own a 23,000 square foot building in a suburb of Minneapolis, Minnesota, in which our headquarters is located. A term note with approximately $1.0 million outstanding at January 31, 2003, is payable in monthly installments of $8,612, including interest at 7.125%, through May 2009, and is secured by a first mortgage on our office headquarters.

     We lease a 23,600 square foot building in a suburb of Minneapolis, Minnesota that we have used as warehouse space. During fiscal 2002, we decided to close this facility and, beginning in fiscal 2003, we will be utilizing a third-party for distribution of product to our stores, which is expected to result in cost savings. We are actively trying to sublet this facility.

     We lease all the locations for our Company-owned stores. We anticipate that any new Company-owned stores will have ten-year leases with at least one five-year renewal option.

     We believe that the space provided by our corporate headquarters is suitable and adequate to meet our operations for the foreseeable future.

ITEM 3.      LEGAL PROCEEDINGS.

     We are not a party to any material litigation nor are we aware of any threatened litigation that could have a material adverse effect on our business.

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

     No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended January 31, 2003.

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PART II

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

     (a)  Market Information

     Since July 2, 2002 our common stock has traded on the Over-the-Counter Bulletin Board under the symbol “PWHS.OB.” Prior to July 2, 2002, and since August 4, 2001, our common stock traded on the NASDAQ SmallCap Market under the symbol “PWHS.” Prior to August 4, 2001, and since November 25, 1997, our common stock traded on the NASDAQ National Market under the symbol “PWHS.” The following table summarizes the high and low closing sale prices per share of our common stock for the periods indicated, as reported on the respective markets. The prices for the first quarter of fiscal 2001 reflect the retroactive application of our April 2001 one-for-three reverse stock split. These prices do not include commissions, mark-ups or markdowns.

     (b)  Holders

     As of April 25, 2003, we had approximately 150 shareholders of record and an estimated 700 beneficial shareholders.

     (c)  Dividends

     We have never declared or paid any cash or stock dividends with respect to our common stock, as it is our policy, and the policy of our Board of Directors, to retain any earnings to provide for our growth and development. In addition, the declaration and payment of dividends is prohibited under our revolving line of credit agreement as well as the trust indenture for our subordinated debentures.

     (d)  Recent Sale of Unregistered Securities

     We did not engage in any unregistered sales of equity securities during our fiscal year ended January 31, 2003.

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ITEM 6.      SELECTED FINANCIAL DATA.

     The Selected Financial Data presented below should be read in conjunction with the Consolidated 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 fiscal years ended January 31, 2003, February 1, 2002, February 2, 2001 and January 28, 2000 (fiscal years 2002, 2001, 2000 and 1999, respectively) have been derived from our Consolidated Financial Statements as audited by Grant Thornton LLP, independent certified public accountants. The Selected Financial Data as of and for the year ended January 29, 1999 (fiscal year 1998) has been derived from our Consolidated Financial Statements as audited by KPMG LLP, independent certified public accountants.

Summary of Financial and Operating Data
(Dollars in thousands, except per share data)