<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q/A
                                 Amendment No. 1

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the quarterly period ended June 25, 2000

                                       or

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

    For the transition period from __________________ to _____________________


Commission file number: 0-17868


                            KRAUSE'S FURNITURE, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          Delaware                                              77-0310773
-------------------------------------------------------------------------------
(State or other jurisdiction                                 (I.R.S. Employer
of incorporation)                                           Identification No.)


200 North Berry Street, Brea, California                         92821-3903
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)


                                 (714) 990-3100
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


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

As of August 4, 2000 the Registrant had 22,777,598 shares of Common Stock
outstanding.

<PAGE>   2

                                     INDEX

                                                                          Page
                                                                         -------
PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         - Consolidated balance sheet (unaudited)                           3

         - Consolidated statement of operations (unaudited)                 4

         - Consolidated statement of cash flows (unaudited)                 5

         - Notes to consolidated financial statements (unaudited)        6 - 9

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                   10 - 16

Item 3.  Market Risk                                                       16

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings                                                 17

Item 2.  Changes in Securities and Use of Proceeds                         17

Item 3.  Defaults Upon Senior Securities                                   17

Item 4.  Submission of Matters to a Vote of Security Holders               17

Item 5.  Other Information                                                 18

Item 6.  Exhibits and Reports on Form 8-K                                  18

         SIGNATURES                                                        19


                                       2

<PAGE>   3

PART I, ITEM 1

                            KRAUSE'S FURNITURE, INC.

                           CONSOLIDATED BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                            June 25,     December 26,
                                                              2000           1999
                                                            --------     ------------
                                                          (unaudited)

<S>                                                         <C>            <C>
                                     ASSETS
Current assets:
    Cash and cash equivalents                               $ 10,246       $     80
    Accounts receivable, net of allowance of $272 for
      doubtful accounts ($197 at December 26, 1999)            1,265            569
    Inventories                                               24,536         25,289
    Prepaid expenses                                           1,973            656
                                                            --------       --------
        Total current assets                                  38,020         26,594

Property, equipment, and leasehold improvements, net          16,849         15,592
Goodwill, net                                                 11,902         12,412
Leasehold interests, net                                         593            700
Other assets                                                   2,528          2,463
                                                            --------       --------
                                                            $ 69,892       $ 57,761
                                                            ========       ========

              LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                        $ 10,689       $ 14,610
    Accrued payroll and related expenses                       1,907          2,086
    Other accrued liabilities                                  4,425          6,054
    Customer deposits                                          7,524          4,949
    Notes payable                                              1,416            491
                                                            --------       --------
        Total current liabilities                             25,961         28,190
                                                            --------       --------

Long-term liabilities:
    Notes payable                                             22,982         23,346
    Other                                                      2,014          1,960
                                                            --------       --------
        Total long-term liabilities                           24,996         25,306
                                                            --------       --------

Commitments and contingencies

Mandatorily redeemable preferred stock, $.001 par
    value, 450,000 designated, 394,952 shares
    outstanding; redemption value $50 per share               19,456             --

Stockholders' equity (deficit):
    Convertible preferred stock, $.001 par value;
         2,666,667 shares authorized, 450,000
         designated; 394,952 shares outstanding                   --             --
    Common stock, $.001 par value; 100,000,000
         shares authorized, 22,493,509 shares
         outstanding (22,050,328 at December 26, 1999)            22             22
    Capital in excess of par value                            64,653         60,642
    Accumulated deficit                                      (65,196)       (56,399)
                                                            --------       --------
        Total stockholders' equity (deficit)                    (521)         4,265
                                                            --------       --------
                                                            $ 69,892       $ 57,761
                                                            ========       ========
</TABLE>

                             See accompanying notes.

                                       3

<PAGE>   4

                            KRAUSE'S FURNITURE, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Thirteen Weeks Ended          Twenty-Six Weeks Ended
                                                       -----------------------       ------------------------
                                                       June 25,       June 27,       June 25,        June 27,
                                                         2000           1999           2000           1999
                                                       --------       --------       --------       --------
<S>                                                    <C>            <C>            <C>            <C>
Net sales                                              $ 35,299       $ 34,830       $ 74,316       $ 69,764
Cost of sales                                            16,096         15,599         33,673         31,709
                                                       --------       --------       --------       --------
Gross profit                                             19,203         19,231         40,643         38,055

Operating expenses:
    Selling                                              18,663         17,088         38,301         34,367
    General and administrative                            3,347          2,749          6,423          5,254
    Amortization of goodwill                                255            255            510            510
                                                       --------       --------       --------       --------
                                                         22,265         20,092         45,234         40,131
                                                       --------       --------       --------       --------

Loss from operations                                     (3,062)          (861)        (4,591)        (2,076)

Interest expense                                           (980)          (719)        (1,615)        (1,431)
Other income                                                 15             12             --             22
                                                       --------       --------       --------       --------
Net loss                                               $ (4,027)      $ (1,568)      $ (6,206)      $ (3,485)
                                                       ========       ========       ========       ========
Basic and diluted loss per share                       $   (.18)      $   (.07)      $   (.40)      $   (.16)
                                                       ========       ========       ========       ========
Number of shares used in computing loss per share        22,089         21,984         22,070         21,984
                                                       ========       ========       ========       ========
</TABLE>

                             See accompanying notes.


                                       4

<PAGE>   5

                             KRAUSE'S FURNITURE, INC

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             Twenty-Six Weeks Ended
                                                           -------------------------
                                                            June 25,        June 27,
                                                              2000           1999
                                                           ---------       ---------
<S>                                                         <C>            <C>
Cash flows from operating activities:
Net loss                                                    $ (6,206)      $ (3,485)
    Adjustments to reconcile net loss to net cash
      used by operating activities:
      Depreciation and amortization                            1,684          1,668
      Other non-cash charges                                   1,216            559
   Change in assets and liabilities
      Accounts receivable                                       (696)          (293)
      Inventories                                                753         (2,278)
      Prepaid expenses and other assets                           71           (263)
      Accounts payable and other liabilities                  (5,675)         1,274
      Customer deposits                                        2,575          2,371
                                                            --------       --------
            Net cash used by operating activities             (6,278)          (447)
                                                            --------       --------

Cash flows from investing activities:
    Capital expenditures                                      (2,414)        (1,606)
                                                            --------       --------
            Net cash used by investing activities             (2,414)        (1,606)
                                                            --------       --------

Cash flows from financing activities:
    Proceeds from long-term borrowings                        92,498         80,590
    Principal payments on long-term borrowings               (92,340)       (78,537)
    Net proceeds from issuance of mandatorily
        redeemable preferred stock                            18,700             --
                                                            --------       --------
            Net cash provided by financing activities         18,858          2,053
                                                            --------       --------
Net increase in cash                                          10,166             --
Cash and cash equivalents at beginning of period                  80             80
                                                            --------       --------
Cash and cash equivalents at end of period                  $ 10,246       $     80
                                                            ========       ========
Supplemental disclosures of cash flow information -
    Cash paid during the period for interest                $    895       $    672
    Issuance of mandatorily redeemable preferred stock
        to pre-pay interest on subordinated debt               2,175             --
    Conversion of mandatorily redeemable preferred
        stock to common stock                                    480             --
</TABLE>

                             See accompanying notes.


                                       5

<PAGE>   6

                             KRAUSE'S FURNITURE, INC

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  Basis of Presentation.

        The accompanying consolidated financial statements of Krause's
Furniture, Inc. (the "Company") and its wholly owned subsidiaries, including the
Company's principal subsidiary, Krause's Custom Crafted Furniture Corp.
("Krause's") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation for
the periods reported. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules or
regulations, although management believes that the disclosures made are adequate
to make the information presented not misleading.

        In January 2000, the Company changed its fiscal year from the Sunday
closest to January 31 to the Sunday closest to December 25. This report is for
the unaudited second fiscal 2000 quarter ended June 25, 2000. Unaudited
operating and cash flow information has been presented for the comparable 1999
period.

        These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 26, 1999. The
results of operations for the thirteen and twenty-six weeks ended June 25, 2000
are not necessarily indicative of results to be expected in future periods.

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

2.  Inventories

        Inventories are carried at the lower of cost or market using the
first-in, first-out method and are comprised of the following:

                                                     June 25,       December 26,
                                                      2000             1999
                                                     -------        ------------
                                                          (in thousands)
        Manufactured finished goods                  $ 8,320           $ 7,991
        Finished goods purchased from others          11,334            10,370
        Work in progress                                 350               180
        Raw materials                                  4,532             6,748
                                                     -------           -------
                                                     $24,536           $25,289
                                                     =======           =======


                                       6


<PAGE>   7

                             KRAUSE'S FURNITURE, INC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)

3.  Notes Payable

        Notes payable consists of the following:

                                                       June 25,     December 26,
                                                        2000           1999
                                                       -------      ------------
                                                            (in thousands)
        Secured revolving credit notes                 $13,001        $12,655
        Subordinated notes payable to shareholders      12,001         12,001
        Unamortized debt discount, net of
           accumulated amortization of $2,523
           ($2,120 at December 26, 1999)                (1,752)        (2,155)
        Other notes                                      1,148          1,336
                                                       -------        -------
                                                        24,398         23,837
        Less current portion                             1,416            491
                                                       -------        -------
                                                       $22,982        $23,346
                                                       =======        =======

        The secured revolving credit notes were issued under a revolving credit
agreement, which was most recently amended March 31, 2000, (the "Revolving
Credit Facility") between Krause's and a financial institution that expires
March 2002. The Revolving Credit Facility provides for revolving loans of up to
$15 million, based on the value of eligible inventories. Available borrowing
capacity under the terms of the Revolving Credit Facility at June 25, 2000 was
$728,000. Substantially all of Krause's assets are pledged as collateral for the
loan that is guaranteed by the Company. Interest on the loan is payable monthly
at a margin ranging from .5% to 1.0% in excess of the prime rate (9.50% at June
25, 2000) which margin varies depending on the Company's performance.

        Pursuant to the terms of the agreements related to the subordinated
notes and the Revolving Credit Facility, the Company and Krause's are required
to maintain certain financial ratios and minimum levels of tangible net worth
and working capital. In addition, the Company and Krause's are restricted from
entering into certain transactions or making certain payments and dividend
distributions without the prior consent of the lenders. As of June 25, 2000, the
Company and Krause's were in compliance with the terms and conditions of the
Revolving Credit Facility but were out of compliance with certain of the terms
and conditions of the subordinated notes. Subsequent to June 25, 2000, the
Company received a waiver of such non-compliance and amendments to future
covenants from the holders of the subordinated notes. It is possible the Company
may not be in compliance with its loan covenants in the third quarter of fiscal
2000; however, management believes, based upon its historical experience, that
it will be able to obtain waivers and/or amendments to the covenants.

4.  Net Loss Per Share

        Net loss per share amounts were computed based on the weighted average
number of common shares outstanding during the periods reported. Common
equivalent shares are not included in the computation since such share
equivalents are antidilutive. There were no differences between basic and
diluted loss per share. A deemed dividend related to a favorable conversion
feature of the Company's Series A Convertible Preferred Stock has been deducted
from the net loss to arrive at loss available to common shareholders.


                                       7


<PAGE>   8

                             KRAUSE'S FURNITURE, INC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)

        The following is a reconciliation of the Company's net loss and weighted
average shares outstanding for the purpose of calculating basic and diluted loss
per share for all periods:

<TABLE>
<CAPTION>
                                                  Thirteen Weeks Ended          Twenty-Six Weeks Ended
                                                 -----------------------       ------------------------
                                                 June 25,       June 27,       June 25,       June 27,
                                                   2000           1999           2000           1999
                                                 --------       --------       --------       --------
                                                                     (in thousands)
<S>                                              <C>            <C>            <C>            <C>
      Net Loss                                   $ (4,027)      $ (1,568)      $ (6,206)      $ (3,485)
      Less: deemed preferred stock dividend            --             --          2,591             --
                                                 --------       --------       --------       --------
      Loss allocated to common stockholders      $ (4,027)      $ (1,568)      $ (8,797)      $ (3,485)
                                                 ========       ========       ========       ========
      Weighted average shares outstanding          22,089         21,984         22,070         21,984
                                                 ========       ========       ========       ========
      Basic and diluted loss per share           $  (0.18)      $  (0.07)      $  (0.40)      $  (0.16)
                                                 ========       ========       ========       ========
</TABLE>

5.  Mandatorily Redeemable Preferred Stock

        On January 14 and 19, 2000, the Company completed a private placement of
380,000 shares of Series A Convertible Preferred Stock at a price of $50.00 per
share. Proceeds from the private placement totaled $18,700,000 after deducting
legal fees and related expenses. Pursuant to the terms of a Securities Purchase
Agreement between the Company and the purchasers of the Series A Convertible
Preferred Stock, the Company and the purchasers have agreed that $10 million of
the proceeds will be used to launch the Company's business to business and
e-Commerce activities, including commerce related to transactions on the
internet, and that the balance of the proceeds will be used to pay down debt, to
fund the opening of new showrooms, and for general corporate purposes.

        On May 5, 2000, the Company issued 24,702 shares of Series A Convertible
Preferred Stock at a price of $50.00 per share in lieu of cash interest on its
subordinated notes covering the thirteen-month period from March 1, 2000 through
March 31, 2001. These shares were valued at $2,175,000 based on the market value
on May 5, 2000 of the underlying Common Stock. The Company recorded this value
as prepaid interest, recorded the stated value of these shares, $1,235,000, as
mandatorily redeemable preferred stock, and the difference of $940,000 as
capital in excess of par value. It will amortize the prepaid interest using
the straight-line method over the related period which ends on March 31, 2001.

        Each share of Series A Convertible Preferred Stock is convertible into
approximately 45.45 shares of Common Stock at any time at the option of the
holder; has voting rights equal to approximately 45.45 shares of Common Stock;
has certain redemption features; and does not pay a dividend. Conversion is
mandatory upon the occurrence of a qualified public offering, as defined. In the
event of a voluntary or involuntary liquidation, the holders of the Series A
Convertible Preferred Stock have, as to any distribution of assets, a preference
to the holders of Common Stock in an amount aggregating $19,748,000 at June 25,
2000 or $50.00 per outstanding share. Holders of the Series A Convertible
Preferred Stock may not request redemption prior to January, 2005, except in the
event of a change in control of the Company or a default, prior to January,
2002, under the Securities Purchase Agreement an event of default includes the
Company's failure to receive approval of the Board of Directors of its
e-Commerce business plan and its failure to use $10 million of proceeds from the
private placement for its e-Commerce business plan. The redemption price of the
Series A Convertible Preferred Stock is equal to $50.00 per share. The Company
has no right to call or redeem any shares of the Series A Convertible Preferred
Stock.

        During the thirteen weeks ended June 25, 2000, holders of 9,750 shares
of Series A Convertible Preferred Stock converted their shares into 443,181
shares of Common Stock of the Company.


                                       8


<PAGE>   9

                             KRAUSE'S FURNITURE, INC

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)

6.  Restatement

        For the 13 week period ended June 25, 2000, the previously reported
interest expense and net loss has been restated to reflect a shortened
amortization period for the prepaid interest associated with the issuance on May
5, 2000, of the Company's Series A Convertible Preferred Stock in lieu of cash
interest for the period March 1, 2000 through March 31, 2001. This caused a
$157,000 increase in interest expense and a corresponding increase in net loss.
The Company's net loss per common share is unchanged and there is no impact on
operating results or cash flows.

        For the 26 week period ended June 25, 2000 the previously reported loss
per share has been restated to account for the fact that a favorable conversion
feature of the Company's Series A Convertible Preferred Stock, issued on January
14 and 19, 2000, should be characterized as a deemed dividend to the holders of
preferred shares at that time and deducted from earnings available to common
shareholders in calculating net loss per share. This restatement increased the
loss available to common shareholders by $2,591,000 and, along with the interest
expense increase discussed above, increased the loss per share from $0.27 to
$0.40.

        In addition, certain balance sheet items at June 25, 2000, have been
reclassified to reflect the shortened amortization period for the prepaid
interest discussed above as well as to increase capital in excess of par value
and reduce mandatorily redeemable preferred stock.

        The tables below summarize the changes in the Balance Sheet as of the
date presented and Statement Of Operations for the periods presented:

<TABLE>
<CAPTION>
                                                    June 25, 2000
                                              -------------------------
                                              As Reported     Restated
                                              -----------     ---------
<S>                                            <C>            <C>
Prepaid expenses                                $   467        $ 1,973
Other assets                                      4,191          2,528
Preferred Stock                                  20,396         19,456
Stockholder's equity (deficit)                   (1,304)          (521)
</TABLE>

<TABLE>
<CAPTION>
                                                Thirteen Weeks Ended          Twenty-Six Weeks Ended
                                                    June 25, 2000                 June 25, 2000
                                              -------------------------      -------------------------
                                              As Reported     Restated       As Reported      Restated
                                              -----------     ---------      -----------      --------
<S>                                            <C>            <C>            <C>              <C>
Interest expense                                $   823        $   980          $ 1,458       $ 1,615
Net loss                                         (3,870)        (4,027)          (6,049)       (6,206)
Basic and diluted loss per share                $ (0.18)       $ (0.18)         $ (0.27)      $ (0.40)
</TABLE>


                                       9

<PAGE>   10

PART I, ITEM 2

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Management's Discussion and Analysis of Financial Condition and Results
of Operations includes forward-looking statements within the meaning of the
Private Securities Reform Act of 1995. These statements include those related to
the Company's plans for sales through e-Commerce and business-to-business
channels; management's strategy for opening new stores, remodeling existing
stores and improving the Company's marketing approach; and those related to
management's expectation that the Company will achieve profitability. They also
include statements throughout the report using such forward-looking terminology
as "may," "will," "expect," "anticipate," "continue," "estimate," or the
negative of these terms or other comparable terminology. These statements
involve risks and uncertainties which may cause results to differ materially
from those set forth in these statements. Among other things,

        o   we lack experience in e-Commerce and business-to-business sales;

        o   demand for and acceptance of the Company's products could decrease;

        o   the market for furniture sales over the internet may not grow;

        o   the retail environment and the ability of the Company to execute its
            operating strategies could deteriorate;

        o   the Company's planned marketing and promotional campaigns may not be
            successful; and

        o   developer delays, weather and other conditions could slow the
            opening of new stores; and competition from existing and new
            competitors could increase.

        These risks and the other economic, competitive and other factors noted
elsewhere in this Form 10-Q and in filings recently made by the Company with the
Securities and Exchange Commission, including the Company's Form 10-K and a
Registration Statement on Form S-3, which became effective on May 23, 2000,
constitute cautionary statements that identify risks and uncertainties that
could cause actual results to differ materially from those contained in the
forward-looking statements.

        The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.

        In 1997, management implemented a strategic plan for the business which
provides, among other things, for remodeling showrooms to provide a more
appealing setting for customers, opening new showrooms both in existing and new
markets and closing underperforming showrooms. To date, 38 showrooms have been
remodeled, 31 showrooms have been opened, and 16 showrooms have been closed. In
the opinion of management, this plan is expected to ultimately return the
Company to profitability; however, there can be no assurance that the Company
will achieve profitability.

        As more fully described in Note 5 to the Consolidated Financial
Statements, on January 14 and 19, 2000, the Company completed a private
placement of 380,000 shares of Series A Convertible Preferred Stock, net
proceeds from which totaled $18,700,000; of this amount, $10,000,000 is
earmarked for the development and implementation of the Company's internet
business initiatives.


                                       10


<PAGE>   11

Management believes this investment will more rapidly enable the Company to
leverage its considerable manufacturing and distribution assets by becoming a
leading retail e-Commerce provider in custom upholstered furniture while also
providing business-to-business solutions for other furniture e-retailers and
independent furniture retailers served by internet alliance customers; however,
there can be no assurance that the Company will be successful in this regard.

        Management believes that the Company will have sufficient capital to
fund its operations, remodel showrooms and open new showrooms, pay interest on
its debt, and make scheduled repayments of its subordinated notes for the next
twelve months as well as to support the launch of its business-to-business and
e-Commerce initiatives; however, if this proves not to be the case, the Company
will need to obtain additional capital and there can be no assurance that any
additional equity or debt financing will be available or available on terms
acceptable to the Company. The Company's long-term success is dependent upon
management's ability to successfully execute its plans and, ultimately, to
achieve sustained profitable operations.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's principal cash needs are for funding capital expenditures
to open new showrooms and remodel existing showrooms; for manufacturing samples
of upholstered furniture for display in its new and existing showrooms as well
as to purchase merchandise from other manufacturers that complements the
upholstered furniture manufactured and displayed by the Company; for funding
capital expenditures related to the improvement and maintenance of its
management information systems; to fund the development and deployment of the
Company's e-Commerce strategy; and to pay interest on its debt. The cash
required for funding production and fulfillment of customer orders is typically
provided by the Company's customers from a deposit made at the time an order is
placed. Beginning on March 31, 2001 and quarterly thereafter, the Company will
also require capital to make the scheduled principal payments on its
subordinated notes.

        In recent periods, the Company has incurred additional debt and raised
equity capital to cover operating deficits and to finance the remodeling and
expansion of its showrooms. On May 5, 2000, the Company and the holders of its
subordinated notes exercised their respective options to eliminate cash interest
on the subordinated notes for the period March 1, 2000 through March 31, 2001 in
exchange for issuance of 24,702 shares of Series A Convertible Preferred Stock.
In fiscal 2000, management plans to add approximately sixteen to eighteen
additional showrooms (of which eight have been opened through June 25, 2000), at
an aggregate cost of approximately $2.7 million. In addition, current plans call
for the closing of approximately six showrooms of which three have been closed
through June 25, 2000. Management expects to fund such capital expenditures by
internally generated cash, by borrowings under the Company's Revolving Credit
Facility, and from cash on hand, including up to $2.5 million of funds earmarked
for the Company's e-Commerce initiatives.

        As of June 25, 2000, the Company had cash and cash equivalents of
$10,246,000 and unused borrowing capacity under its revolving credit agreement
of approximately $728,000. Approximately $9,633,000 of the Company's cash and
cash equivalents at June 25, 2000 was earmarked for the development and
implementation of the Company's e-Commerce initiatives. Cash flow activity for
the twenty-six weeks ended June 25, 2000 and June 27, 1999 is presented in the
Consolidated Statement of Cash Flows.


                                       11


<PAGE>   12

Cash Flow - Twenty-Six weeks ended June 25, 2000

        During the twenty-six weeks ended June 25, 2000, cash and cash
equivalents increased by $10,166,000. Operating activities used net cash of
$6,278,000, principally from a cash loss from operations of $3,306,000; a
decrease in accounts payable and other liabilities of $5,675,000, and an
increase in accounts receivable of $696,000, all of which were offset in part by
increased customer deposits of $2,575,000 and decreases in inventories of
$753,000 and prepaid expenses and other assets of $71,000. Investing activities
during the period included capital expenditures of $2,414,000 which was used
primarily to open eight new showrooms and to fund capital requirements of the
ongoing upgrade of the management information systems infrastructure. Financing
activities during the period consisted principally of net proceeds of
$18,700,000 from the sale of 380,000 shares of Series A Convertible Preferred
Stock, net borrowings of $346,000 on the Company's Revolving Credit Facility and
$188,000 of principal payments on other indebtedness. Non-cash financing
activities included the issuance of 24,702 shares of Series A Convertible
Preferred Stock valued at $2,175,000 in payment of interest on subordinated
notes for the period from March 1, 2000 through March 31, 2001.

Cash Flow - Twenty-Six weeks ended June 27, 1999

        Cash and cash equivalents at June 27, 1999 did not change. During the
twenty-six weeks ended June 27, 1999, operating activities used in net cash of
$447,000, principally from a cash loss from operations of $1,258,000 and
increases inventories, prepaid expenses and accounts receivable of $2,278,000,
$263,000 and $293,000, respectively, all of which were partially offset by
increases in customer deposits, and accounts payable and other liabilities of
$2,371,000 and $1,274,000, respectively. Investing and financing activities
during the period included capital expenditures of $1,606,000 and net borrowings
of $2,053,000 primarily from the Company's Revolving Credit Facility.



                                       12

<PAGE>   13

RESULTS OF OPERATIONS

        The following table sets forth the percentage relationship of net sales
to certain items included in the Consolidated Statement of Operations:

<TABLE>
<CAPTION>
                                        Thirteen Weeks Ended          Twenty-Six Weeks Ended
                                       -----------------------       ------------------------
                                       June 25,       June 27,       June 25,        June 27,
                                         2000           1999           2000            1999
                                       --------       --------       --------        --------
<S>                                     <C>            <C>            <C>            <C>
Net sales                               100.0%         100.0%         100.0%         100.0%
Cost of sales                            45.6           44.8           45.3           45.5
                                        -----          -----          -----          -----
Gross profit                             54.4           55.2           54.7           54.5

Operating expenses:
    Selling                              52.9           49.1           51.5           49.3
    General and administrative            9.5            7.9            8.6            7.5
    Amortization of goodwill              0.7            0.7            0.7            0.7
                                        -----          -----          -----          -----
                                         63.1           57.7           60.8           57.5
                                        -----          -----          -----          -----

Loss from operations                     (8.7)          (2.5)          (6.1)          (3.0)
Interest expense                         (2.8)          (2.1)          (2.2)          (2.1)
Other income (expense)                     --             --             --             --
                                        -----          -----          -----          -----
Net loss                                (11.5%)         (4.6%)         (8.3%)         (5.1%)
                                        =====          =====          =====          =====
</TABLE>

<TABLE>
<CAPTION>

Store Data                              Thirteen Weeks Ended          Twenty-Six Weeks Ended
----------                             -----------------------       ------------------------
                                       June 25,       June 27,       June 25,        June 27,
                                         2000           1999           2000            1999
                                       --------       --------       --------        --------
<S>                                     <C>            <C>            <C>            <C>
Stores open at beginning of period         95             91             91             85
Stores opened during period                 2              1              8              8
Stores closed during period                 1              3              3              4
                                        -----           ----          -----           ----
Stores open at end of period               96             89             96             89
                                        =====           ====          =====           ====
Average sales per showroom(1)           $ 370           $391          $ 785           $780
Comparable store sales
  increase (decrease)(2)                 (8.0%)          3.3%          (1.2%)         8.2%
</TABLE>

-----------------
(1) Based upon the weighted average number of stores open during the period
    indicated.

(2) Comparable store sales are calculated by excluding the net sales of any
    store for any month of the period if the store was not open during the
    same month of the prior period. Also, a store opened at any time during
    the month is deemed to have been open for the entire month.


                                       13

<PAGE>   14

Thirteen weeks ended June 25, 2000 compared to thirteen weeks ended June 27,
1999

        Net Sales. Net sales for the thirteen weeks ended June 25, 2000 were
$35,299,000 compared to $34,830,000 for the comparable period of fiscal 1999.
The overall $469,000 increase in net sales was composed of a $4,677,000 increase
from new stores and $448,000 of sales from the e-Commerce division offset in
part by a $2,622,000 or 8.0% decrease in same store sales and a $2,034,000
decrease from closed stores. The decrease in comparable store sales occurred
during May and June and is believed to be the result of an economic downturn
that was experienced throughout the home furnishings industry.

        Gross Profit. Gross profit was 54.4% of net sales in the thirteen weeks
ended June 25, 2000, as compared to 55.2% of net sales for the comparable period
of fiscal 1999. The decrease in gross profit, as a percentage of sales, was due
largely to a 0.3% dilution from sales of the e-Commerce division and
manufacturing inefficiencies.

        Selling Expenses. Selling expenses were $18,663,000 or 52.9% of sales in
the thirteen weeks ended June 25, 2000 compared to $17,088,000 or 49.1% of sales
in the same period last year. The increase of $1,575,000 in selling expenses was
primarily due to higher occupancy costs related to new store openings, higher
advertising costs as a result of increased use of color circulars, and higher
delivery expenses that are transitional in nature and related to the Company's
strategic decision to increase its use of outsourcing. $34,000 of the total
increase is related to expenses of the e-Commerce division.

        General and Administrative Expenses. General and administrative expenses
increased by $598,000 and as a percentage of sales rose from 7.9% for the
quarter ended June 27, 1999 to 9.5% for the quarter ended June 25, 2000.
Approximately $359,000 of the total increase is related to expenses of the
e-Commerce initiative, consisting primarily of strategy consulting costs and
costs incurred in connection with the Company's management information systems
conversion. The remainder of the increase is primarily a result of higher
payroll costs.

        Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, net of interest income, for the quarter
ended June 25, 2000 increased by $261,000 over the same period in the prior
fiscal year. Interest expense increased due to higher average outstanding
revolving debt, higher interest rates as well as higher interest expense on the
subordinated notes as more fully described in Note 5 to the Consolidated
Financial Statements. Partially offsetting these increases was interest earned
on invested funds. Interest expense consists of the following:

                                                  Thirteen Weeks Ended
                                                  ---------------------
                                                  June 25,     June 27,
                                                    2000         1999
                                                  --------     --------
                                                     (in thousands)
Interest expense on debt                           $  917        $526
Amortization of debt discounts and deferred
    financing costs                                   220         193
                                                   ------        ----
                                                    1,137         719
Interest income                                       157          --
                                                   ------        ----
Interest expense, net                              $  980        $719
                                                   ======        ====


                                       14


<PAGE>   15

        Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either the second quarter of fiscal 2000 or fiscal 1999 due to
uncertainties regarding the realization of deferred tax assets available.

        Net Loss. As a result of the above factors, the net loss was $4,027,000
for the quarter ended June 25, 2000 as compared to a loss of $1,568,000 in the
same period of the prior fiscal year. Net loss per share in the 2000 quarter was
$0.18 versus a loss of $0.07 in the same period of fiscal 1999.

Twenty-six weeks ended June 25, 2000 compared to twenty-six weeks ended June 27,
1999

        Net Sales. Net sales for the twenty-six weeks ended June 25, 2000 were
$74,316,000 compared to $69,764,000 for the comparable period of fiscal 1999,
representing an increase of $4,552,000 or 6.5%. The overall $4,552,000 increase
in net sales is attributable to a $9,599,000 increase from new stores, and
$459,000 of sales of the e-Commerce division offset in part by a decrease of $
4,831,000 from closed stores and a $764,000 or 1.2% decrease in same-store
sales.

        Gross Profit. Gross profit was 54.7% of net sales in the twenty-six
weeks ended June 25, 2000, as compared to 54.5% of net sales for the comparable
period of fiscal 1999. The increase in gross profit was primarily the result of
higher retail prices partially offset by a 0.2% dilution from a lower gross
margin on the $459,000 of sales of the e-Commerce division.

        Selling Expenses. Selling expenses were $38,301,000 or 51.5% of sales in
the twenty-six weeks ended June 25, 2000 compared to $34,367,000 or 49.3% of
sales in the same period last year. The increase of $3,934,000 in selling
expenses was primarily due to higher variable expenses related to increased
sales volume, higher occupancy costs related to new store openings, higher
advertising costs as a result of increased use of color circulars, and higher
delivery expenses that are transitional in nature and related to the Company's
strategic decision to increase its use of outsourcing. $77,000 of the total
increase is related to expenses from the e-Commerce division.

        General and Administrative Expenses. General and administrative expenses
increased by $1,169,000 and as a percentage of sales rose from 7.5% for the
twenty-six weeks ended June 27, 1999 to 8.6% for the twenty-six weeks ended June
25, 2000. Approximately $524,000 of the total increase is related to expenses of
the e-Commerce initiative, consisting primarily of strategy consulting costs and
costs incurred in connection with the Company's management information systems
conversion. The remainder of the increase is primarily a result of higher
payroll costs.



                                       15

<PAGE>   16

        Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, net of interest income, for the
twenty-six weeks ended June 25, 2000 increased by $184,000 over the same period
in the prior fiscal year. Interest expense increased due to higher average
outstanding revolving debt and related increases in interest rates as well as
higher interest expense on the subordinated notes as more fully described in
Note 5 to the Consolidated Financial Statements. Partially offsetting these
increases was interest earned on invested funds. Interest expense consists of
the following:

                                                  Twenty-six Weeks Ended
                                                  -----------------------
                                                  June 25,       June 27,
                                                    2000          1999
                                                  --------       --------
                                                      (in thousands)

Interest expense on debt                           $1,470        $1,043
Amortization of debt discounts and deferred
    financing costs                                   414           388
                                                   ------        ------
                                                    1,884         1,431
Interest income                                       269            --
                                                   ------        ------
Interest expense, net                              $1,615        $1,431
                                                   ======        ======

        Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either the twenty-six weeks ended June 25, 2000 or fiscal 1999
due to uncertainties regarding the realization of deferred tax assets available.

        Net Loss. As a result of the above factors, the net loss was $6,206,000
for the twenty-six weeks ended June 25, 2000 as compared to a loss of $3,485,000
in the same period of the prior fiscal year. Net loss per share in the 2000
period was $0.40 versus a loss of $0.16 in the same period of fiscal 1999. Of
the $0.24 increase in net loss per share, the factors referred to above account
for $0.12 of that increase and the deemed preferred stock dividend attributable
to the beneficial conversion feature in connection with the issuance of 380,000
shares of Series A Convertible Preferred Stock accounts for the remaining $0.12
increase (See Note 5).

Recent Accounting Pronouncements

        During the second quarter of fiscal year 2000, Emerging Issues Task
Force (EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was
issued. EITF No. 00-10 clarifies the accounting treatment and classification of
the Company's delivery revenues and expenses and will be adopted by the Company
in the fourth quarter of the current fiscal year. The adoption of this EITF will
only affect the classification of certain revenues and costs related to delivery
services and will not affect the Company's net income (loss).

PART I, ITEM 3

Market Risk Exposure

        There were no material changes in items affecting market risk. Refer to
the Company's Annual Report on Form 10-K for the year ended December 26, 1999
for more detail.


                                       16

<PAGE>   17

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         Reference is made to Item 3 in the Company's Annual Report on Form 10-K
         for the fiscal year ended December 26, 1999. There has been no material
         change.

Item 2.  Changes in Securities and Use of Proceeds

         None

Item 3.  Defaults Upon Senior Securities

         None

Item 4.  Submission of Matters to a Vote of Security-Holders

         (a)   The Annual Meeting of Stockholders of the Company was held on May
               17, 2000 (the "Annual Meeting"). Proxies were solicited pursuant
               to the Regulation 14A under the Securities Exchange Act of 1934,
               as amended.

         (b)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock (who are
               entitled to vote their shares on an as if converted basis)
               elected the existing Board of Directors to serve for the ensuing
               year. The number of votes cast in favor and withheld for each
               nominee for each director is shown in the table below. There were
               no abstentions or broker non-votes in respect of this proposal.

                     Nominee                Votes in Favor        Votes Withheld
               -----------------------------------------------------------------
               Kamal G. Abdeinour             33,340,437              277,409
               Jeffery H. Coats               33,343,437              274,409
               Peter H. Dailey                33,342,437              275,409
               Thomas M. DeLitto              33,340,477              277,369
               John A. Gavin                  33,340,437              277,409
               George L. Hashbarger           33,343,437              274,409
               Philip M. Hawley               33,341,437              276,409

         (c)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock approved an
               amendment to the 1997 Stock Incentive Plan increasing the number
               of shares that may be awarded by 2,500,000 shares to a total of
               4,500,000. There were 26,746,966 votes cast in favor, 898,204
               votes cast against, 10,027 votes abstaining and 5,962,649 non
               votes with respect to this matter.

         (d)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock approved
               the Series A Convertible Preferred Stock Purchase Agreement dated
               January 11, 2000 and the transactions related thereto, including
               an amendment of the Company's Certificate of Incorporation to
               increase the authorized Common Stock of the Company to 44,943,783
               shares in order to permit the conversion of the Company's Series
               A Convertible Preferred Stock, and the amendment of the
               Certificate of Designation of the Series A Convertible Preferred
               Stock. There were 27,433,653 votes cast in favor, 214,117 votes
               cast against, 7,427 votes abstaining and 5,962,649 non-votes with
               respect to this matter.


                                       17


<PAGE>   18

         (e)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock approved an
               amendment to the Certificate of Incorporation of the Company
               increasing the authorized Common Stock of the Company to
               100,000,000 shares in order to make additional Common Stock
               available for the exercise of incentive options and for general
               corporate purposes. There were 27,288,291 votes cast in favor,
               357,602 votes cast against, 9,304 votes abstaining and 5,962,649
               non-votes with respect to this matter.

         (f)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock approved an
               amendment to the Certificate of Incorporation of the Company
               increasing the authorized preferred stock of the Company by
               2,000,000 shares to a total of 2,666,667 shares in order to make
               additional preferred stock available for general corporate
               purposes. There were 26,779,860 votes cast in favor, 867,670
               votes cast against, 7,667 votes abstaining and 5,962,649
               non-votes with respect to this matter.

         (g)   At the Annual Meeting, holders of the shares of the Company's
               Common Stock and Series A Convertible Preferred Stock approved
               the selection of Arthur Andersen LLP to serve as independent
               auditors to examine the Company's financial statements for the
               fiscal year ending December 24, 2000. There were 33,600,554 votes
               cast in favor, 10,818 votes cast against and 6,474 votes
               abstaining with respect to this matter.

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K filed during the quarter ended June
         25, 2000

         (a) 27.1 -- Financial Data Schedule (EDGAR version only)

         (b) Reports on Form 8-K

             None.


                                       18

<PAGE>   19

                                   SIGNATURES

         Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.


                                         KRAUSE'S FURNITURE, INC.
                                         (Registrant)


Date: October 20, 2000                   /s/ Philip M. Hawley
                                         ---------------------------------------
                                         Philip M. Hawley
                                         Chairman of the Board and Chief
                                         Executive Officer
                                         (Principal Executive Officer)



Date: October 20, 2000                   /s/ Robert A. Burton
                                         ---------------------------------------
                                         Robert A. Burton
                                         Executive Vice President and Chief
                                         Financial Officer
                                         (Principal Financial Officer and
                                         Principal Accounting Officer)


                                       19


<PAGE>   20

                                 EXHIBIT INDEX

         EXHIBIT
         NUMBER                   DESCRIPTION
         -------                  -----------
          27.1               Financial Data Schedule