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                                                                    EXHIBIT 10.1

                SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT


         THIS SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of August 23, 1999, is entered into by and between
CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"),
with a place of business at 225 South Lake Avenue, Suite 1000, Pasadena,
California 91101 and KRAUSE'S CUSTOM CRAFTED FURNITURE CORP., a California
corporation (formerly known as Krause's Sofa Factory), and its wholly owned
subsidiary, CASTRO CONVERTIBLE CORPORATION, a New York corporation (jointly and
severally, "Borrower"), with its chief executive office located at 200 North
Berry Street, Brea, California 92821.


                                    RECITALS

         A. Borrower and Lender have previously entered into that certain Loan
and Security Agreement dated as of January 20, 1995, as amended by that certain
First Amendment to Loan and Security Agreement dated as of May 10, 1996, that
certain Second Amendment to Loan and Security Agreement dated as of August 26,
1996, that certain Third Amendment to Loan and Security Agreement dated as of
November 25, 1996, that certain Fourth Amendment to Loan and Security Agreement
dated as of August 14, 1997, that certain Fifth Amendment to Loan and Security
Agreement dated as of December 11, 1997 and that certain Sixth Amendment to Loan
and Security Agreement dated as of March 15, 1999 (collectively, the "Loan
Agreement"), pursuant to which Lender has made certain loans and financial
accommodations available to Borrower. Terms used herein without definition shall
have the meanings ascribed to them in the Loan Agreement.

         B. Borrower has requested that Lender (i) temporarily increase the
advance rates set forth in Section 2.1(a) of the Loan Agreement during the
period commencing August 23, 1999 and ending January 21, 2000, (ii) delete
paragraph (c) of Section 2.1 to eliminate duplication with Section 2.4 of the
Loan Agreement, (iii) modify the negative covenant relating to permitted
indebtedness to allow additional indebtedness to Parent in an amount not to
exceed Eight Million One Hundred Nineteen Thousand Four Hundred Seventeen
Dollars ($8,119,417), (iv) adjust the financial covenant relating to EBITDA for
the period after August 1, 1999 and (v) waive breach by Borrower of the
financial covenant relating to EBITDA for the trailing four fiscal quarter
period ended August 1, 1999 and the negative covenant relating to indebtedness
resulting from the additional indebtedness to Parent.

         C. Lender is willing to agree to such temporary increase and to make
such further amendments to the Loan Agreement and such waiver under the terms
and conditions set forth in this Amendment. Borrower is entering into this
Amendment with the understanding and agreement that none of Lender's rights or
remedies as set forth in the Loan Agreement is being waived or modified by the
terms of this Amendment.

         NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:


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         1. Temporary Increase in Advance Rate. During the period commencing
August 23, 1999 and ending January 21, 2000, Section 2.1(a) of the Loan
Agreement shall be temporarily amended in its entirety to read as follows;
provided, that on January 22, 2000, Borrower shall immediately repay to Lender
any outstanding amount of the Revolving Loans in excess of the amount available
under the lending formula provided in Section 2.1(a) of the Loan Agreement in
effect prior to this Amendment and this temporary amendment to Section 2.1(a)
shall be of no further force or effect:

            "(a) Subject to and upon terms and conditions contained herein,
         Lender agrees to make Revolving Loans to Borrower from time to time in
         amounts requested by Borrower up to the amount equal to the sum of:

                           (i) seventy-five percent (75%) of the Value of
                  Eligible Inventory; plus

                           (ii) notwithstanding the exclusion of raw materials
                  from the definition of Eligible Inventory, the lesser of (i)
                  fifty percent (50%) of the Value of Eligible Raw Materials or
                  (ii) One Million Five Hundred Thousand Dollars ($1,500,000);
                  less

                           (iii) any Availability Reserves."

         2. Amendments to Loan Agreement.

            (a) Paragraph (c) of Section 2.1 of the Loan Agreement (entitled
         "Revolving Loans") is hereby deleted in its entirety.

            (b) Paragraph (e) of Section 9.9 of the Loan Agreement (entitled
         "Indebtedness") is hereby amended and restated in its entirety as
         follows:

                 "(e) unsecured indebtedness of Borrower to Krause's Furniture,
             Inc., a Delaware corporation ("Parent"), in a maximum amount of
             Thirty Two Million Three Hundred Sixty Nine Thousand Four Hundred
             Seventeen Dollars ($32,369,417) consisting of: (i) Two Million
             Seven Hundred Thousand Dollars ($2,700,000) evidenced by that
             certain amended and restated Promissory Note, dated as of January
             20, 1995, issued by Borrower payable to Parent, which amount is the
             result of reducing the outstanding principal amount of such
             indebtedness of Four Million Seven Hundred Thousand Dollars
             ($4,700,000) as of January 20, 1995 by Two Million Dollars
             ($2,000,000) funded from the initial advances hereunder; (ii) up to
             One Million Dollars ($1,000,000) in payment under Borrower's
             agreement to indemnify Parent from any loss, cost, expense or
             liability incurred by Parent in providing cash collateral for the
             issuance of an One Million Dollars ($1,000,000) standby letter of
             credit for the benefit of the landlord of Borrower's Brea,
             California facility, which letter of credit expires in 1999 and, if
             drawn prior to its expiry, will be treated as a bullet loan from
             Parent to Borrower due January 20, 2000 in the amount of any draw
             thereunder; (iii) One Million Seven Hundred Fifty Thousand Dollars
             ($1,750,000) of indebtedness advanced by Parent to Borrower during
             the period from January 20, 1995 through August 22, 1996, evidenced
             by those certain Promissory Notes, dated, respectively: as of
             September 22, 1995 in the original principal amount of Five Hundred
             Thousand Dollars ($500,000); as of May 3, 1996 in the original
             principal amount of Five Hundred Thousand Dollars ($500,000); and
             as of May 22, 1996 in the original amount of Seven Hundred Fifty
             Thousand Dollars


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             ($750,000), each issued by Borrower payable to Parent; (iv) Five
             Million Dollars ($5,000,000) of indebtedness evidenced by that
             certain Promissory Note, dated as of August 26, 1996, issued by
             Borrower payable to Parent; (v) One Million Dollars ($1,000,000) of
             indebtedness evidenced by that certain Promissory Note, dated as of
             September 27, 1996, issued by Borrower payable to Parent; (vi) One
             Million Five Hundred Thousand Dollars ($1,500,000) of indebtedness
             evidenced by that certain Promissory Note, dated as of October 18,
             1996, issued by Borrower payable to Parent; (vii) Two Million Five
             Hundred Thousand Dollars ($2,500,000) of indebtedness evidenced by
             that certain Promissory Note, dated as of November 26, 1996, issued
             by Borrower payable to Parent; (viii) One Million Five Hundred
             Thousand Dollars ($1,500,000) of indebtedness evidenced by that
             certain Promissory Note, dated as of January 10, 1997, issued by
             Borrower payable to Parent; (ix) Five Hundred Thousand Dollars
             ($500,000) of indebtedness evidenced by that certain Promissory
             Note, dated as of April 3, 1997, issued by Borrower payable to
             Parent; (x) Two Hundred Thousand Dollars ($200,000) of indebtedness
             evidenced by that certain Promissory Note, dated as of May 14,
             1997, issued by Borrower payable to Parent; (xi) Three Million
             Dollars ($3,000,000) of indebtedness as evidenced by that certain
             Promissory Note, dated as of August 15, 1997, issued by Borrower
             payable to Parent; (xii) Three Million Five Hundred Thousand
             Dollars ($3,500,000) of indebtedness evidenced by that certain
             Promissory Note, dated as of December 31, 1997, issued by Borrower
             payable to Parent; (xiii) Six Million One Hundred Eighty-Nine
             Thousand Six Hundred Seventeen Dollars ($6,189,617) of indebtedness
             evidenced by that certain Promissory Note, dated as of April 3,
             1998, issued by Borrower payable to Parent; (xiv) One Million Eight
             Hundred One Thousand Eight Hundred Dollars ($1,801,800) of
             indebtedness evidenced by that certain Promissory Note, dated as of
             April 7, 1998, issued by Borrower payable to Parent; (xv) One
             Hundred Twenty-Eight Thousand Dollars ($128,000) of indebtedness
             evidenced by that certain Promissory Note, dated as of July 16,
             1998, issued by Borrower payable to Parent; and (xvi) up to One
             Hundred Thousand Dollars ($100,000) of additional indebtedness to
             be extended by Parent to Borrower, from time to time; all of which
             indebtedness is subject to, and subordinate in right of payment to,
             the right of Lender to receive the prior payment in full of all of
             the Obligations; provided, that: (i) Borrower shall not, directly
             or indirectly, make any payments in respect of such indebtedness,
             including, but not limited to, any prepayments or other
             non-mandatory payments, except that until an Event of Default, or
             event which with notice or passage of time or both would constitute
             an Event of Default, shall exist or have occurred and be
             continuing, Borrower may make payments of principal and interest in
             accordance with the terms of that certain Amended and Restated
             Subordination Agreement between Parent and Lender dated August 26,
             1996 (the "Subordination Agreement"), (ii) Borrower shall not,
             directly or indirectly, (A) amend, modify, alter or change any
             terms of such indebtedness or any agreement, document or instrument
             related thereto, or (B) redeem, retire, defease, purchase or
             otherwise acquire such indebtedness, or set aside or otherwise
             deposit or invest any sums for such purpose, except as permitted by
             the Subordination Agreement, and (iii) Borrower shall furnish to
             Lender all notices, demands or other materials concerning such
             indebtedness either received by Borrower or on its behalf, promptly
             after receipt thereof, or sent by Borrower or on its behalf,
             concurrently with the sending thereof, as the case may be."

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             (c) Section 9.15 of the Loan Agreement (entitled "Minimum EBITDA")
             is hereby amended and restated in its entirety to read as follows:

                 "9.15 Minimum EBITDA. Borrower shall for each trailing four
             fiscal quarter period ending on the dates set forth below, measured
             on and as of each such dates, have EBITDA of not less than the
             amount set forth next to such ending date:

                 Four Quarter
                 Period Ending                               Amount
                 -------------                             -----------
                 October 31, 1999                          $ 4,250,000
                 January 30, 2000                          $ 4,750,000
                 April 30, 2000                            $ 5,800,000
                 July 30, 2000                             $ 8,750,000
                 October 29, 2000 and thereafter           $10,000,000."

         3. Waiver by Lender of Compliance with Covenants in the Loan Agreement.
Borrower hereby acknowledges that (a) as of the end of the fiscal quarter ended
August 1, 1999, it was not in compliance with the financial covenant relating to
EBITDA set forth in Section 9.15 of the Loan Agreement and (b) it has failed to
obtain Lender's written consent prior to incurring additional indebtedness to
Parent in the amount of Eight Million One Hundred Nineteen Thousand Four Hundred
Seventeen Dollars ($8,119,417) in violation of Section 9.9 of the Loan
Agreement, and that such non-compliance and failure constitute Events of Default
under the Loan Agreement. Lender hereby waives compliance by Borrower with the
financial covenant set forth in Section 9.15 of the Loan Agreement through the
end of the fiscal quarter ended August 1, 1999, and shall not exercise its
rights and remedies under the Loan Agreement or applicable law in respect of
such Event of Default; provided, however, that Lender shall be free to exercise
all of its rights and remedies under the Loan Agreement in the event of
Borrower's non-compliance with Section 9.15 of the Loan Agreement after August
1, 1999. Lender further waives Borrower's violation with the negative covenant
set forth in Section 9.9 of the Loan Agreement resulting from Borrower's failure
to obtain Lender's written consent prior to incurring additional indebtedness to
Parent in the amount of Eight Million One Hundred Nineteen Thousand Four Hundred
Seventeen Dollars ($8,119,417) and shall not exercise its rights and remedies
under the Loan Agreement or applicable law in respect of such Event of Default;
provided, however, that Lender shall be free to exercise all of its rights and
remedies under the Loan Agreement in the event that Borrower has incurred or
incurs indebtedness not permitted by the Loan Agreement, as amended hereby. The
foregoing waiver is not a continuing waiver, and Lender does not by this waiver
amend the terms and provisions of the Loan Agreement. Upon the occurrence of any
Event of Default after the date hereof, or in the event that Lender learns of
any Event of Default which occurred prior to the date hereof (other than a
breach of the financial covenant set forth in Section 9.15 of the Loan Agreement
for the fiscal quarter ended August 1, 1999 or a violation of the negative
covenant set forth in Section 9.9 of the Loan Agreement resulting from
indebtedness of Borrower expressly permitted hereby), Lender shall be free to
exercise any and all of its various rights and remedies under the Loan
Agreement.

         4. Effectiveness of this Amendment. Lender must have received the
following items, in form and substance acceptable to Lender, or evidence of the
occurrence thereof, before this Amendment is effective and before Lender is
required to extend any credit to Borrower as provided for by this Amendment.

            (a) Amendment. This Amendment fully executed in a sufficient number
of counterparts for distribution to Lender and Borrower.

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            (b) Authorizations. Evidence that the execution, delivery and
performance by Borrower and each guarantor or subordinating creditor of this
Amendment and any instrument or agreement required under this Amendment have
been duly authorized.

            (c) Acknowledgement from Parent. Lender shall have received, in form
and substance satisfactory to Lender, an acknowledgement from Parent that the
additional indebtedness of Borrower in the amount of Eight Million One Hundred
Nineteen Thousand Four Hundred Seventeen Dollars ($8,119,417.00) is "Junior
Debt" as defined in that certain Amended and Restated Subordination Agreement
dated as of August 26, 1996, between Parent and Lender, and is subject to the
terms and conditions thereof.

            (d) Representations and Warranties. The representations and
warranties of Borrower set forth in the Loan Agreement must be true and correct.

            (e) Other Required Documentation. All other documents and legal
matters in connection with the transactions contemplated by this Amendment shall
have been delivered or executed or recorded and shall be in form and substance
satisfactory to Lender.

            (f) Payment of Modification Fee. Lender shall have received from
Borrower a modification fee of Thirty-Seven Thousand Dollars ($37,500) for the
processing and approval of this Amendment, which fee shall be fully earned as of
and payable on the date hereof.

         5. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, and the rights of the parties hereunder, shall
be determined under, governed by, and construed in accordance with the laws of
the State of California governing contracts wholly to be performed in that
State.

         6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute but one and the same instrument.

         7. Due Execution. The execution, delivery and performance of this
Amendment are within the powers of the Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.

         8. Otherwise Not Affected. In the event of any conflict or
inconsistency between the Loan Agreement and the provisions of this Amendment,
the provisions of this Amendment shall govern. Except to the extent set forth
herein, the Loan Agreement shall remain in full force and effect.

         9. Ratification. Borrower hereby restates, ratifies and reaffirms each
and every term and condition set forth in the Loan Agreement, as amended hereby,
and the Financing Agreements effective as of the date hereof.

         10. Estoppel. To induce Lender to enter into this Amendment and to
continue to make advances to Borrower under the Loan Agreement, Borrower hereby
acknowledges and agrees that, after giving effect to this Amendment, as of the
date hereof, there exists no Event of Default and no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect to
the Obligations.

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         IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.


                                       KRAUSE'S CUSTOM CRAFTED FURNITURE CORP.,
                                       a California corporation


                                       By:   /s/  Robert A. Burton
                                             ----------------------------------
                                       Name:      Robert A. Burton
                                       Title:     Executive Vice President and
                                                  Chief Financial Officer


                                       CASTRO CONVERTIBLE CORPORATION,
                                       a New York corporation


                                       By:   /s/  Robert A. Burton
                                             ----------------------------------
                                       Name:      Robert A. Burton
                                       Title:     Executive Vice President and
                                                  Chief Financial Officer


                                       CONGRESS FINANCIAL CORPORATION (WESTERN),
                                       a California corporation


                                       By:        D.B. Laughton
                                             ----------------------------------
                                       Name:      D.B. Laughton
                                       Title:     Vice President



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                                 ACKNOWLEDGMENT

         The undersigned Krause's Furniture, Inc., a Delaware corporation
("KFI"), parent of Krause's Custom Crafted Furniture Corp. ("Krause's"), in
consideration of Congress Financial Corporation (Western) ("Congress") continued
extension of credit to Krause's and Castro Convertible Corporation, hereby
consents to the foregoing Seventh Amendment to Loan and Security Agreement and
acknowledges and confirms that its Guarantee dated November 25, 1996 (the
"Guarantee") in favor of Congress remains in full force and effect. Although
Congress has informed KFI of the matters set forth above, and KFI has
acknowledged the same, KFI understands and agrees that Congress has no duty
under the Loan Agreement as defined above, the Guarantee or any other agreement
with KFI to so notify KFI or to seek such an acknowledgment, and nothing
contained herein is intended to or shall create such a duty as to any advances
or transactions hereafter.


Dated: August 23, 1999                       KRAUSE'S FURNITURE, INC.,
                                               a Delaware corporation



                                             By:   /s/ Robert A. Burton
                                                   -----------------------------
                                             Name: Robert A. Burton
                                                   -----------------------------
                                             Title: Executive Vice President and
                                                    Chief Financial Officer
                                                    ----------------------------


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