Document:

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                                                                EXHIBIT NO. 10.1

                               SECOND AMENDMENT TO
                              EMPLOYMENT AGREEMENT

                                     BETWEEN

                            KRAUSE'S FURNITURE, INC.

                                       AND

                                PHILIP M. HAWLEY

This Second Amendment to Employment Agreement is effective as of January 28,
2001, between Krause's Furniture, Inc. ("KFI") and Philip M. Hawley, and is
entered into to amend the Employment Agreement between the parties hereto dated
as of August 26, 1996, as subsequently amended on February 13, 1998 (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 December 31, 2001." Either party may
          terminate the agreement at any time by providing the other party
          ninety (90) days' prior written notice.

     1.2. 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 1, 2002."

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

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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    KAMAL ABDELNOUR
                                                     ---------------------------
                                                  Name  Kamal Abdelnour
                                                  Title Director, Chairman of
                                                        Compensation Comittee<PAGE>   1
                                                                EXHIBIT NO. 10.2

EXECUTIVE EMPLOYMENT AGREEMENT

HERBERT J. FRIEDMAN
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This Executive Employment Agreement, dated as of July 1, 2000, is between
KRAUSE'S FURNITURE, INC., a Delaware corporation (the "Company") and HERBERT J.
FRIEDMAN, an individual residing at 7121 Country Club Lane, Anaheim, California
("Executive").

1.   POSITION AND RESPONSIBILITIES

     a. POSITION. Executive is employed by the Company to render services to the
Company in the position of President. Executive shall perform such duties and
responsibilities as are normally related to such position in accordance with the
standards of the industry and any additional duties now or hereafter assigned to
Executive by the Company. Executive shall abide by the rules, regulations, and
practices as adopted or modified from time to time in the Company's sole
discretion.

     b. TERM. The term of this agreement is thirty-six (36) months, from July 1,
2000, through June 30, 2003, SUBJECT TO Executive receiving ninety (90) days
prior written notice of termination as set forth in Paragraph 3.b. below. If the
Company gives Executive ninety (90) days notice after March 31, 2003, the term
of this agreement shall continue to include a full ninety (90) days of notice.

     b. OTHER ACTIVITIES. Except upon the prior written consent of the Company,
Executive will not, during the term of this Agreement, (i) accept any other
employment, or (ii) engage, directly or indirectly, in any other business
activity (whether or not pursued for pecuniary advantage) that might interfere
with Executive's duties and responsibilities hereunder or create a conflict of
interest with the Company.

     c. NO CONFLICT. Executive represents and warrants that Executive's
execution of this Agreement, Executive's employment with the Company, and the
performance of Executive's proposed duties under this Agreement shall not
violate any obligations Executive may have to any other employer, person or
entity, including any obligations with respect to proprietary or confidential
information of any other person or entity.

2.   COMPENSATION AND BENEFITS

     BASE SALARY. In consideration of the services to be rendered under this
Agreement, the Company shall pay Executive a salary at the rate of Two Hundred
Fifty Thousand Dollars ($250,000.00) per year ("Base Salary"). The Base Salary
shall be paid in accordance with the Company's regularly established payroll
practice. Executive's Base Salary will be reviewed from time to time in
accordance with the established procedures of the Company for adjusting salaries
for similarly situated employees and may be adjusted in the sole discretion of
the Company.

     d. STOCK OPTIONS. The Company recommended to the Board of Directors that
Executive be provided with options to purchase 100,000 shares of the Common
Stock of the Company. This recommendation was considered and approved at the
Company's Board of Directors' meeting on July 17, 2000. Executive and the
Company have executed the Stock Option Agreement.

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     e. BENEFITS. Executive shall be eligible to participate in the benefits
made generally available by the Company to similarly-situated Executives, in
accordance with the benefit plans established by the Company, and as may be
amended from time to time in the Company's sole discretion.

     f. EXPENSES. The Company shall reimburse Executive for reasonable business
expenses incurred in the performance of Executive's duties hereunder in
accordance with the Company's expense reimbursement guidelines.

3.   TERMINATION BY COMPANY

     a. TERMINATION BY COMPANY. The Company may terminate Executive's employment
with the Company at any time, with ninety (90) days' advance written notice, for
any reason or no reason at all, notwithstanding anything to the contrary
contained in or arising from any statements, policies or practices of the
Company relating to the employment, discipline or termination of its employees.
Upon and after such termination, all obligations of the Company under this
Agreement shall cease.

     b. SEVERANCE. Except in situations where the employment of Executive is
terminated For Cause, By Death or By Disability (as defined in Section 4 below),
in the event that the Company terminates the employment of Executive at any
time, Executive will be eligible to receive an amount equal to twelve (12)
months of the then-current Base Salary of the Executive payable in the form of
salary continuation and commencing at the expiration of the ninety-day notice.
In addition to the Base Salary, such Severance shall include continuation of all
Executive's employee benefits for the period of Severance payment. Such
Severance shall be reduced by any remuneration paid to Executive because of
Executive's employment or self-employment during the severance period, and
Executive shall promptly report all such remuneration to the Company in writing.
Executive's eligibility for severance is conditioned on Executive having first
signed a release agreement in the standard Company form. Executive shall not be
entitled to any severance payments if Executive's employment is terminated For
Cause, By Death or By Disability (as defined in Section 4 below) or if
Executive's employment is terminated by Executive (in accordance with Section 5
below).

4.   OTHER TERMINATIONS BY COMPANY

     c. TERMINATION FOR CAUSE. For purposes of this Agreement, "For Cause" shall
mean: (i) Executive commits a crime involving dishonesty, breach of trust, or
physical harm to any person; (ii) Executive willfully engages in conduct that is
in bad faith and materially injurious to the Company, including but not limited
to, misappropriation of trade secrets, fraud or embezzlement; (iii) Executive
commits a material breach of this Agreement, which breach is not cured within
twenty days after written notice to Executive from the Company; (iv) Executive
willfully refuses to implement or follow a lawful policy or directive of the
Company, which breach is not cured within twenty days after written notice to
Executive from the Company; or (v) Executive engages in misfeasance or
malfeasance demonstrated by a pattern of failure to perform job duties
diligently and professionally. The Company may terminate Executive's employment
For Cause at any time, without any advance notice. The Company shall pay to
Executive all compensation to which Executive is entitled up through the date of
termination, subject to any other rights or remedies of Employer under law; and
thereafter all obligations of the Company under this Agreement shall cease.

     d. BY DEATH. Executive's employment shall terminate automatically upon
Executive's death. The Company shall pay to Executive's beneficiaries or estate,
as appropriate, any compensation then due

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and owing. Thereafter all obligations of the Company under this Agreement shall
cease. Nothing in this Section shall affect any entitlement of Executive's heirs
or devisees to the benefits of any life insurance plan or other applicable
benefits.

     e. BY DISABILITY. If Executive becomes eligible for the Company's long term
disability benefits or if, in the sole opinion of the Company, Executive is
unable to carry out the responsibilities and functions of the position held by
Executive by reason of any physical or mental impairment for more than ninety
consecutive days or more than one hundred and twenty days in any twelve-month
period, then, to the extent permitted by law, the Company may terminate
Executive's employment. The Company shall pay to Executive all compensation to
which Executive is entitled up through the date of termination, and thereafter
all obligations of the Company under this Agreement shall cease. Nothing in this
Section shall affect Executive's rights under any disability plan in which
Executive is a participant.

5.   TERMINATION BY EXECUTIVE

     f. TERMINATION BY EXECUTIVE. Executive may terminate employment with the
Company at any time for any reason or no reason at all, upon ninety (90) days'
advance written notice. During such notice period Executive shall continue to
diligently perform all of Executive's duties hereunder. The Company shall have
the option, in its sole discretion, to make Executive's termination effective at
any time prior to the end of such notice period as long as the Company pays
Executive all compensation to which Executive is entitled up through the last
day of the ninety-day notice period. Thereafter all obligations of the Company
shall cease.

     g. TERMINATION FOR GOOD REASON AFTER CHANGE OF CONTROL. Executive's
termination shall be for "Good Reason" if Executive provides written notice to
the Company of the Good Reason within six months of the event constituting Good
Reason and provides the Company with a period of twenty days to cure the Good
Reason and the Company fails to cure the Good Reason within that period. For
purposes of this Agreement, "Good Reason" shall mean any of the following events
if (i) the event is effected by the Company without the consent of Executive and
(ii) such event occurs after a Change in Control (as hereinafter defined): (A) a
change in Executive's position with Employer which materially reduces
Executive's level of responsibility; (B) a material reduction in Executive's
Base Salary, except for reductions that are comparable to reductions generally
applicable to similarly situated executives of the Company; or (C) a relocation
of Executive's principal place of employment by more than fifty miles. In such
event Executive may terminate his employment for Good Reason, in which case
Executive will be eligible to receive an amount equal to twelve (12) months of
Executive's then-current Base Salary payable in the form of salary continuation,
plus continuation of all Executive's employee benefits for the period of
Severance payment. Executive's eligibility for severance is conditioned on
Executive having first signed a release agreement in the standard Company form.
Such Severance shall be reduced by any remuneration paid to Executive because of
Executive's employment or self-employment during the severance period, and
Executive shall promptly report all such remuneration to the Company or its
successor in writing. Thereafter all obligations of the Company or its successor
under this Agreement shall cease.

     h. "CHANGE OF CONTROL." For purposes of this Agreement, "Change of Control"
shall mean a change in ownership or control of the Company effected through a
merger, consolidation or acquisition by any person or related group of persons
(other than an acquisition by the Company or by a Company-sponsored employee
benefit plan or by a person or persons that directly or indirectly controls, is
controlled by, or is under common control with, the Company) of beneficial
ownership (within the meaning of

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Rule 13d-3 of the Securities Exchange Act of 1934) of securities possessing more
than fifty percent of the total combined voting power of the outstanding
securities of the Company.

6.   TERMINATION OBLIGATIONS

     RETURN OF PROPERTY. Executive agrees that all property (including without
limitation all equipment, tangible proprietary information, documents, records,
notes, contracts and computer-generated materials) furnished to or created or
prepared by Executive incident to Executive's employment belongs to the Company
and shall be promptly returned to the Company upon termination of Executive's
employment.

     j. RESIGNATION AND COOPERATION. Upon termination of Executive's employment,
Executive shall be deemed to have resigned from all offices and directorships
then held with the Company. Following any termination of employment, Executive
shall cooperate with the Company in the winding up of pending work on behalf of
the Company and the orderly transfer of work to other employees. Executive shall
also cooperate with the Company in the defense of any action brought by any
third party against the Company that relates to Executive's employment by the
Company.

7.   INVENTIONS AND PROPRIETARY INFORMATION; PROHIBITION ON THIRD PARTY
     INFORMATION

     k. PROPRIETARY INFORMATION AGREEMENT. Executive agrees to comply with all
the terms and provisions of the Company's policy regarding proprietary Company
information.

     l. NON-SOLICITATION. Executive acknowledges that because of Executive's
position in the Company, Executive will have access to material intellectual
property and confidential information. During the term of Executive's employment
and for one year thereafter, in addition to Executive's other obligations
hereunder or under the Proprietary Information Agreement, Executive shall not,
for Executive or any third party, directly or indirectly (a) divert or attempt
to divert from the Company any business of any kind, including without
limitation the solicitation of or interference with any of its customers,
clients, members, business partners or suppliers, or (b) solicit or otherwise
induce any person employed by the Company to terminate his employment.

     m. NON-DISCLOSURE OF THIRD PARTY INFORMATION. Executive represents and
warrants and covenants that Executive shall not disclose to the Company, or use,
or induce the Company to use, any proprietary information or trade secrets of
others at any time, including but not limited to any proprietary information or
trade secrets of any former employer, if any; and Executive acknowledges and
agrees that any violation of this provision shall be grounds for Executive's
immediate termination and could subject Executive to substantial civil
liabilities and criminal penalties. Executive further specifically and expressly
acknowledges that no officer or other employee or representative of the Company
has requested or instructed Executive to disclose or use any such third party
proprietary information or trade secrets.

8.   ARBITRATION

Executive agrees that any dispute or controversy arising under or in connection
with this Agreement shall be resolved in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that Mr. Friedman
shall be entitled to seek specific performance of his right to be paid until the
termination of his

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employment during the pendency of any dispute or controversy arising under or in
connection with this Agreement.

9.   AMENDMENTS; WAIVERS; REMEDIES

This Agreement may not be amended or waived except by a writing signed by
Executive and by a duly authorized representative of the Company other than
Executive. Failure to exercise any right under this Agreement shall not
constitute a waiver of such right. Any waiver of any breach of this Agreement
shall not operate as a waiver of any subsequent breaches. All rights or remedies
specified for a party herein shall be cumulative and in addition to all other
rights and remedies of the party hereunder or under applicable law.

10.  ASSIGNMENT; BINDING EFFECT

     n. ASSIGNMENT. The performance of Executive is personal hereunder, and
Executive agrees that Executive shall have no right to assign and shall not
assign or purport to assign any rights or obligations under this Agreement. This
Agreement may be assigned or transferred by the Company; and nothing in this
Agreement shall prevent the consolidation, merger or sale of the Company or a
sale of any or all or substantially all of its assets.

     o. BINDING EFFECT. Subject to the foregoing restriction on assignment by
Executive, this Agreement shall inure to the benefit of and be binding upon each
of the parties; the affiliates, officers, directors, agents, successors and
assigns of the Company; and the heirs, devisees, spouses, legal representatives
and successors of Executive.

11.  NOTICES

All notices or other communications required or permitted hereunder shall be
made in writing and shall be deemed to have been duly given if delivered: (a) by
hand; (b) by a nationally recognized overnight courier service; or (c) by United
States first class registered or certified mail, return receipt requested, to
the principal address of the other party, as set forth below. The date of notice
shall be deemed to be the earlier of (i) actual receipt of notice by any
permitted means, or (ii) five business days following dispatch by overnight
delivery service or the United States Mail. Executive shall be obligated to
notify the Company in writing of any change in Executive's address. Notice of
change of address shall be effective only when done in accordance with this
paragraph.

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          Company's Notice Address:

          200 North Berry Street
          Brea, CA 92821
          Attention:  Legal Department

          Executive's Notice Address:

          7121 Country Club Lane
          Anaheim Hills, CA 92807

12.  SEVERABILITY

If any provision of this Agreement shall be held by a court or arbitrator to be
invalid, unenforceable, or void, such provision shall be enforced to the fullest
extent permitted by law, and the remainder of this Agreement shall remain in
full force and effect. In the event that the time period or scope of any
provision is declared by a court or arbitrator of competent jurisdiction to
exceed the maximum time period or scope that such court or arbitrator deems
enforceable, then such court or arbitrator shall reduce the time period or scope
to the maximum time period or scope permitted by law.

13.  TAXES

All amounts paid under this Agreement (including without limitation Base Salary
and Severance) shall be paid less all applicable state and federal tax
withholdings and any other withholdings required by any applicable jurisdiction.

14.  GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of
the State of California.

15.  INTERPRETATION

This Agreement shall be construed as a whole, according to its fair meaning, and
not in favor of or against any party. Sections and section headings contained in
this Agreement are for reference purposes only, and shall not affect in any
manner the meaning or interpretation of this Agreement. Whenever the context
requires, references to the singular shall include the plural and the plural the
singular.

16.  OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT

Executive agrees that any and all of Executive's obligations under this
agreement shall survive the termination of employment and the termination of
this Agreement.

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17.  COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original of this Agreement, but all of which together shall
constitute one and the same instrument.

18.  AUTHORITY

Each party represents and warrants that such party has the right, power and
authority to enter into and execute this Agreement and to perform and discharge
all of the obligations hereunder; and that this Agreement constitutes the valid
and legally binding agreement and obligation of such party and is enforceable in
accordance with its terms.

19.  ENTIRE AGREEMENT

This Agreement is intended to be the final, complete, and exclusive statement of
the terms of Executive's employment by the Company and may not be contradicted
by evidence of any prior or contemporaneous statements or agreements, except for
agreements specifically referenced herein (including the Stock Plan and Stock
Option Agreement of the Company). To the extent that the practices, policies or
procedures of the Company, now or in the future, apply to Executive and are
inconsistent with the terms of this Agreement, the provisions of this Agreement
shall control. Any subsequent change in Executive's duties, position, or
compensation will not affect the validity or scope of this Agreement.

20.  EXECUTIVE ACKNOWLEDGEMENT

EXECUTIVE ACKNOWLEDGES EXECUTIVE HAS HAD THE OPPORTUNITY TO CONSULT LEGAL
COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE HAS READ AND UNDERSTANDS THE
AGREEMENT, THAT EXECUTIVE IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT EXECUTIVE
HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE'S OWN JUDGMENT AND NOT ON ANY
REPRESENTATIONS OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the dates
written below.

KRAUSE'S FURNITURE, INC.                     EXECUTIVE:

By: /s/ PHILIP M. HAWLEY                     /s/ HERBERT J. FRIEDMAN
    ------------------------------           ------------------------------
        Philip M. Hawley                         Herbert J. Friedman

Title: Chairman, Chief Executive Officer     Date:

Date:
      ----------------------------

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