<PAGE>   1


                               FIRST AMENDMENT TO
                              EMPLOYMENT AGREEMENT
                                                                   Exhibit 10.18
                                     BETWEEN

                            KRAUSE'S FURNITURE, INC.

                                       AND

                                PHILIP M. HAWLEY

        This First Amendment to Employment Agreement is effective as of February
13, 1998, between Krause's Furniture, Inc. ("KFI") and Philip M. Hawley, is
entered into to amend the Employment Agreement between the parties hereto dated
as of August 26, 1996 (the "Employment Agreement"), with reference to the
following facts:

A.      Mr. Hawley has served as the Chairman of the Board and Chief Executive
        Officer, the position of senior responsibility and authority within the
        KFI Organization since his appointment pursuant to the Employment
        Agreement.

B.      The purpose of this Agreement is to express the terms upon which KFI and
        Mr. Hawley agree to extend the term of employment of Mr. Hawley as
        Chairman of the Board and Chief Executive Officer of KFI.

C.      Mr. Hawley's services to KFI as Chief Executive are extremely valuable
        to KFI and the importance of his leadership and the extraordinary
        responsibilities and demands of his role in the affairs of KFI warrant
        contractual arrangements of the nature herein provided.

D.      Each of KFI and Mr. Hawley wishes to extend the term of Mr. Hawley's
        employment by KFI in his current capacity as Chairman of the Board and
        Chief Executive, subject to the provisions herein.

1.      Amendment to Employment Agreement. The Employment Agreement shall be and
        it hereby is amended as follows:

        1.1.   Extension of Employment Term. Section II.C. of the Employment
               Agreement is hereby amended and restated in its entirety to read
               as follows:

               "II.C. Term Mr. Hawley is hereby employed for a period commencing
               on August 26, 1996 and ending on January 28, 2001."

Other Termination. Section II.G. of the Employment Agreement is amended to
insert in the fourth line of the third paragraph thereof, in place of the date
"August 26, 1999", the date January 29, 2001".

2.      No Other Changes. Except as specifically modified and amended hereby,
        the Employment Agreement and all terms, covenants and conditions therein
        shall remain in

<PAGE>   2


        full force and effect in the form in which executed.

3.      References to Employment Agreement. From and after the date hereof any
        reference in the Employment Agreement or in other materials to the
        Employment Agreement and to any time from or after the date hereof shall
        mean and refer to the Employment Agreement as modified and amended
        hereby, unless otherwise specifically provided.

4.      Entire Agreement. With respect to the matters covered herein the
        Employment Agreement, as modified and amended by this Amendment,
        contains the entire agreement and understanding between Mr. Hawley and
        KFI and supersedes all prior or and written agreements, understandings,
        commitments and practices between the parties, including all prior
        employment agreements, whether or not fully performed by Mr. Hawley
        before the effective date hereof. No amendments to this Employment
        Agreement or this Amendment may be made except by a writing signed by
        both parties.

5.      Titles and Headings. Title and headings in this Amendment are for ease
        of reference and convenience and shall not be used to affect the meaning
        of any provision of this Amendment or the Employment Agreement.

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



                                       /s/ Philip M. Hawley
                                       -----------------------------------------
                                       PHILIP M. HAWLEY


                                       KRAUSE'S FURNITURE, INC.


                                       By:  /s/ Thomas M. DeLitto____
                                       -----------------------------------------
                                       Name:    Thomas M. DeLitto
                                       Title:   Vice Chairman of the Board
                                       Date:    5/27/98