STROUDS INC, 10-K, 1999-05-26

STROUDS INC
10-K, 1999-05-26
HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1999
______________________________________________________________________________

SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------------
FORM 10-K
--------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 27, 1999

[ ] 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 0-24904

STROUDS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-4107241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

780 SOUTH NOGALES STREET
CITY OF INDUSTRY, CA 91748
(Address of principal executive offices)

(626) 912-2866
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

TITLE OF EACH CLASS
Common stock, par value $0.0001

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.
Yes X No
------- -------

(Page 1 of 2 Page Cover Page)

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock on May 17,
1999 as reported on the Nasdaq Stock Market, was approximately $10,009,782.

Number of shares of common stock, par value $0.0001 per share, outstanding at
May 17, 1999: 7,036,981

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III, to be filed no later
than June 11, 1999.

(Page 2 of 2 Page Cover Page)
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PART I
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ITEM 1. BUSINESS
- --------------------

Strouds, Inc. ("Strouds" or the "Company") is a leading specialty retailer of
better quality bed, bath, tabletop and other home textiles products,
decorative accessories, window treatments, furniture and area rugs. The
Company provides interior design assistance and an array of home improvement
services including custom window treatments, window replacements, shutters,
kitchen remodeling, closet organizers and carpeting for complete home
decorating.

The Company was founded in July 1979 by Wilfred C. Stroud, Jr., currently
serving as the Founder, Chairman Emeritus and a director of the Company's
Board of Directors. The first store opened in Pasadena, California in
November 1979 under the name of "Strouds Linen Warehouse." As of February 27,
1999, the end to the Company's fiscal year, the Company operated 65 retail
stores in California, Illinois, Minnesota, Nevada and Maryland. The Company
defines its fiscal year as the period in which most of the business activity
occurs (e.g., the year ending February 27, 1999 is referred to as fiscal
1998).

MERCHANDISING

Strouds carries three primary product groupings: bedding, bath, and tabletop.
Bedding merchandise consists of sheets, comforters, bedding accessories, bed
pillows, comforter covers, mattress pads, blankets, decorative pillows and
bedspreads. Bath merchandise consists of towels, bath accessories, bath rugs,
shower curtains and organization items. Tabletop merchandise consists of
tablecloths, placemats, kitchen textiles and napkin rings. Strouds also
carries a limited assortment of home decorating accessories in a number of its
stores.

The Company's merchandising strategy is to carry a full line of quality
merchandise to appeal to a broad range of customers, with an emphasis on
higher quality products found in better department and specialty home textile
stores. Strouds' merchandise assortment includes popular brand names and a
wide assortment of more fashion-oriented upscale lines and designer
collections, some of which are not available at certain of its department and
specialty store competitors. The Company also maintains and continues to
develop its own private label lines of merchandise. Its private label lines
such as the Joyce Stroud Collection and the JS Relaxed fashion bedding styles
augments its brand name linen lines offering a wide assortment at value
prices. The Company believes that the breadth and depth of its selection
exceeds what is generally available in department stores and is greater than
most other specialty home textile stores.

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The Company's pricing strategy is to maintain everyday low prices that are
substantially below department store regular prices, and consistently at or
below department store "sale" prices and competitive with prices at its
specialty retail competitors for like merchandise. As one of the leading
participants in the home textiles market, the Company believes that it
benefits from volume purchasing advantages that support its competitive
pricing policy.

CUSTOMER SERVICE

Exceptional customer service has always been a key element of the Company's
business strategy. To maintain this service level, the Company continually
invests in customer service training of all management, sales and support
staff within each of its stores. For store management a comprehensive
training program called LEAD (Leadership, Education And Development) is
constantly updated to provide the most current tools available for effective
in-store management, associate training and customer service. The Company
employs its Linen Experts program for sale associates so customers receive the
best information possible on its linen products. The Linen Experts program
takes all sales associates from an initial full-day orientation through a
series of activities including product study, computer education and customer
service training. The program culminates in the Linen Expert Challenge - a
formal examination given twice yearly that, when successfully completed,
entitles the sales associate to wear the Linen Expert badge.

The Company has also taken steps to improve the customer shopping experience
at the point-of-sale ("POS"). This includes developing more efficient "cash
wrap" areas and enhanced POS systems. The Company is currently upgrading its
existing POS system to provide faster credit card authorization, customer
returns and improved customer receipt information regarding their purchases.

The continual investment in customer service and its liberal return policy,
the Company believes, has allowed it to sustain a superior position to its
competitors. This exceptional customer service position has always been a
point of difference for Strouds.

STORE FORMAT

Superstores

In 1988, the Company changed from its original format, which included stores
ranging from 5,000 to 10,000 square feet, to a larger superstore format
averaging 17,500 square feet (excluding a 50,000 square foot superstore in
Irvine, CA) as of fiscal year-end 1998. The primary purpose of the Company's
shift to the superstore format has been to meet the demands of an increasingly
competitive environment. These stores feature improved merchandise
presentations, new merchandise categories, higher quality fixtures and an
overall ambiance that management believes substantially improves the Strouds
shopping experience. These superstores, on average, have experienced higher

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sales volume but lower sales per square foot than the Company's original
format stores. As a result, although occupancy costs per square foot have not
risen significantly, occupancy costs as a percentage of net sales has
increased. This has had a negative effect on the Company's gross profit
margin percentage, which includes buying, occupancy and distribution expenses.
Because of the impact of the shift in store format on average store-level
performance, results in different periods may not be comparable.

All of the Company's original format stores have either been converted to the
superstore or outlet store format. Strouds currently operate 48 superstores
averaging approximately 17,500. The superstores that were open for the full
twelve months ended February 27, 1999 generated average sales of approximately
$3.8 million and average sales per square foot of approximately $221
(excluding the Irvine, CA superstore).

Outlet Stores

The Company has developed, initially through the conversion of original format
and selected superstores, an outlet business utilizing the name and brand
development of the Strouds superstore format. The outlet format averages
8,100 square feet and targets a more bargain-oriented customer. The outlet
store carries a similar breath of merchandise like the Company's superstores
and consists of direct purchases, manufacturers' close-outs, overruns and
irregular product and slow selling merchandise from the Company's superstores.
Currently, the Company operates 17 outlet stores in California comprised of 11
conversions from either the original or superstore format and 6 stores opened
as outlets.

Comparable outlet stores averaged approximately $2.0 million of sales and
produced average sales per square foot of approximately $252 for the twelve
months ended February 27, 1999 (excluding one outlet store which had sales of
approximately $5.6 million and sales per square foot of approximately $552).

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The following table shows, by store format, the number of stores in operation
at the end of each of the following fiscal years and the number of stores
opened, closed or converted during each year.

SUPER- TOTAL
STORE OUTLET ORIGINAL STORES
------- ------- -------- -------
1995 ending store count 46 10 5 61
------- ------- ------- -------
1996
- ----
Stores opened 7 --- --- 7
Stores closed (1) --- --- (1)
Store conversions (1) 4 (3) ---
------- ------- ------- -------
Ending store count 51 14 2 67
------- ------- ------- -------
1997
- ----
Stores opened 2 --- --- 2
Stores closed (2) (1) --- (3)
Store conversions (2) 4 (2) ---
------- ------- ------- -------
Ending store count 49 17 0 66
------- ------- ------- -------
1998
- ----
Stores opened 1 1 --- 2
Stores closed (2) (1) --- (3)
------- ------- ------- -------
Ending store count 48 17 0 65
======= ======= ======= =======
Average square feet per
store February 28,
1998 17,500 8,100 --- 15,600
======= ======= ======= =======

MARKETING AND SALES PROMOTION

The Company employs an aggressive advertising program to build brand awareness
and communicate its extensive selection of exceptional values. The Company
utilizes an everyday low price strategy and frequently runs sales events off
of this strategy. The Company primarily uses full color inserts and direct
mail pieces to reach existing and new customers. In addition, the Company
periodically uses television during peak seasonal periods and for clearance
events.

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MANAGEMENT INFORMATION SYSTEMS

The Company's management information systems ("MIS") are designed to provide
its management and other personnel with timely and easily accessible
information to control and manage their businesses effectively. The Company
has integrated sales activity in its stores, inventory, purchasing, planning
and replenishment, distribution and financial systems. The Company's point-of
sale system provides price and inventory look-up, promotional pricing as well
as a number of back-office administrative features.

The Company continually invests in MIS in order to improve customer service
and reduce operating costs. In fiscal 1998, the Company invested heavily in
remediation efforts associated with the year 2000 problem. This effort has
resulted in upgrades to all its mission critical applications and will provide
a host of new administrative, data capturing and decision making tools. The
Company anticipates it will spend approximately $1.0 million in fiscal 1999 to
complete its remediation efforts, invest in supply chain technologies such as
carton scanning and advance ship notice capabilities, faster credit
authorization at the point-of-sale and internet commerce. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Year 2000."

PRIOR EXPANSION STRATEGY

Strouds expanded into markets outside of its core California markets during
1994 through 1997. The Company opened 13 superstores in the greater Chicago,
Minneapolis and Washington, D.C. markets and Nevada. These stores averaged
over 23,000 square feet and were approximately 35% larger than the Company's
average California superstores. These new superstores carried expanded
product lines and new merchandise categories including housewares. The
majority of these stores experienced high occupancy and operating costs as a
result of low sales volume. As a result of the poor operating results of
these stores in particular, the Company suspended its expansion into new
markets outside of California and announced a restructuring plan, in part, for
the purpose of closing underperforming stores in its expansion markets. As of
February 27, 1999, the Company has closed 3 stores in the greater Chicago and
Minneapolis markets and 1 each in the Washington, D.C. and Nevada markets,
commenced closing its remaining store in the Washington, D.C. market and plans
to close 1 more store in the greater Chicago market.

The Company has continued a strategy to expand in its core California markets.
This expansion strategy consists of strategic in-filling with new stores,
relocations of existing stores to adjust to demographic shifts and store
expansions to meet increasing demands. For its fiscal year ended February 27,
1999, the Company opened 1 superstore and 1 outlet store in Monterey and San
Jose, California, respectively. The continued store development activity in
California has from time to time negatively impacted the sales of existing
Strouds stores. Management believes that the benefits of strengthening its
market presence and adjusting to demographic shifts in the California market
have generally outweighed the reduced sales impact experienced by an existing
Strouds store that may share a particular trade area.

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RESTRUCTURING AND ASSET IMPAIRMENT

Primarily as a result of the factors noted above, the Company initiated a
comprehensive restructuring and cost reduction plan (the "Restructuring
Plan"), resulting in a pretax charge of $16.3 million in fiscal 1996. The
Restructuring Plan is designed to improve the operating performance of the
Company through the closure or disposition of certain underperforming stores,
elimination of underperforming merchandise categories and implementation of
cost reduction measures, including workforce reductions, to more closely align
the Company's cost structure with future expected revenues. Since the
initiation of the Restructuring Plan, the Company has closed 5 stores in its
expansion markets noted above and 2 stores in California as of February 27,
1999. The Company plans to close 2 additional stores in its expansion markets
as noted above.

Cash used in fiscal 1998 related to the Restructuring Plan of $0.9 million was
primarily related to lease termination costs, teardown expenses, consulting
and advisory expenses and employee severance and related costs. As of
February 27, 1999, no changes had been made to the estimated Restructuring
Plan costs and no charges were recorded to operations. The Restructuring Plan
has been substantially completed. The remaining liability is primarily for
the closure of 2 stores, of which the closure terms have yet to be determined.

During fiscal 1996, the Company recorded a pretax charge of $1.8 million for
the impairment of certain operating assets. The principal factors leading up
to the charge were current and future operating losses on individual operating
assets, whereby the carrying value of certain operating assets exceeded the
current estimate of future cash flows from the related assets. In fiscal 1998
and fiscal 1997, the Company had no additional charges for asset impairment.
The Company will continually evaluate the performance of its operating assets
for the factors noted above and, if conditions warrant, write-down the value
of such assets commensurate with the current and estimated future operating
performance.

FUTURE EXPANSION

The Company has substantially completed its restructuring efforts, made
changes to a number of merchandise categories its stores will carry, improved
the physical layout to more visually stimulate the customer, modified the use
of advertising media and increased the frequency of sale events. The
combination of these efforts has resulted in improved operating performance
for most of the Company's stores. Additionally, the revision to the stores'
merchandise categories will result in a scaled down store size which
management believes is more economically efficient. As a result, management
believes that it is now positioned to expand outside of California in a more
effective manner than in its previous expansion efforts. This expansion will
primarily occur, over the next three years, in markets that are contiguous or
in proximity of its core California markets. Management believes that it can
better leverage the Strouds name in these markets. While this name
recognition will assist in supporting the introduction of the Strouds stores,

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the geographic proximity to California will offer logistical economies in
terms of distribution and management.

COMPETITION

The specialty home textile business is fragmented and highly competitive. The
Company competes with many different types of retail stores that sell many or
most of the products sold by the Company. Such competitors include (i)
department stores, (ii) specialty stores (such as specialty home textile
retailers) and other companies operating superstores selling similar product
lines as the Company, (iii) national chain and mass merchandise stores and
(iv) catalog retailers. Many of the Company's competitors have substantially
greater financial and other resources than the Company, including, in some
cases, better name recognition.

The Company believes that the ability to compete successfully in its
geographic markets is determined by several factors, including pricing;
breadth and quality of product selection; in-stock availability of
merchandise; effective merchandise presentation; customer service; and store
locations. The Company believes that it is well-positioned to compete on the
basis of these factors. Nevertheless, there can be no assurance that any or
all of the factors that enable the Company to compete favorably will not be
adopted by companies having greater financial and other resources than the
Company. The home textiles industry is becoming increasingly competitive as
several specialty retailers are expanding into new geographic markets,
including opening stores in California. In addition, if the Company expands
into new geographic markets, it will face new competitors.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's business is subject to seasonal and quarterly fluctuations.
Historically, the Company has realized a higher portion of its net sales and
an even greater proportion of its profits in the months of November, December
and January. Additionally, the timing of promotional events may affect the
Company's results in different quarters from year to year. The Company may
encounter different seasonality factors as it enters new markets outside of
California. The timing of new store openings and related preopening expenses,
and the amount of net sales contributed by new and existing stores, may also
cause the Company's quarterly results of operations to fluctuate.

EMPLOYEES

As of February 27, 1999, Strouds employed approximately 1,637 people, of which
1,367 were hourly employees and 270 were salaried. Of these employees, 1,465
were store employees, 50 were distribution center employees and 122 were
corporate level employees. None of the Company's employees is covered by a
collective bargaining agreement. Management believes that the Company enjoys
good employee relations.

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TRADEMARKS

The Company has registered in the United States Patent and Trademark Office
its service marks "Strouds," "Strouds, The Linen Experts," "Strouds Linen
Outlet" and "Strouds Home Compass" for retail services. Strouds private label
merchandise use the registered marks "Essentials" and "Palette" for bedding,
bath and kitchen textile products.

CAUTIONARY STATEMENT FOR PURPOSE OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained herein that are not related to historical results
are forward-looking statements. Actual results may differ materially from
those projected or implied in the forward-looking statements. Further,
certain forward-looking statements are based upon assumptions of future events
which may not prove to be accurate. These forward-looking statements involve
risks and uncertainties including, but not limited to, those referred to
below.

Credit Availability

At February 27, 1999, the Company utilized a credit facility of up to $50
million for the purpose of supplementing its cash needs for capital
expenditures, inventory and other working capital. The availability of funds
under the revolving credit agreement is limited to the borrowing base (i.e.,
eligible inventory plus eligible accounts receivable) as defined in the credit
agreement. Accordingly, the availability of funds may be less than the
maximum amount available under the credit agreement. The availability of
funds under this revolving credit agreement is subject to the Company
complying with all the terms and conditions of the credit agreement.
Additionally, any breach of the terms and conditions on the part of the
Company may have a significant impact on the credit availability. The
occurrence of any of the factors noted above could substantially impair the
Company's ability to operate its business and/or improve operating results.

Restructuring and Asset Impairment

During the fourth quarter of fiscal 1996, the Company initiated the
Restructuring Plan for the closure or disposition of certain underperforming
stores, elimination of underperforming merchandise categories and
implementation of cost reduction measures. Since the initiation of the
Restructuring Plan, the Company has closed 5 stores in its expansion markets
(greater Chicago, Minneapolis and Washington, D.C. and Nevada) and 2 stores in
California as of February 27, 1999. The Company plans to close 2 additional
stores in its expansion markets. The Restructuring Plan was designed to
improve the operating performance of the Company. The Company can make no
assurances that the Restructuring Plan will improve the operating performance
of the Company or that additional charges will not be incurred in the future
related to additional store closures or dispositions.

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Additionally, the Company periodically evaluates the current and future cash
flows of individual operating assets to determine whether the carrying value
of such assets exceed the current estimate of future cash flows from the
related assets. Such an evaluation resulted in a $1,800,000 pretax charge in
fiscal 1996 for the impairment of certain operating assets. In fiscal 1998
and 1997, the Company had no additional assets impaired. The Company will
continually evaluate the performance of its operating assets for the factors
noted above and can make no assurances that the Company will not incur
additional impairment charges in the future.

Growth Strategy

Strouds expanded into markets outside of its core California markets during
1994 through 1997. The Company opened 13 superstores in the greater Chicago,
Minneapolis and Washington, D.C. markets and Nevada. These stores averaged
over 23,000 square feet and were approximately 35% larger than the Company's
average California superstore. These new superstores carried expanded product
lines and new merchandise categories including housewares. The majority of
these stores experienced high occupancy and operating costs as a result of low
sales volume. As a result of the poor operating results of these stores in
particular, the Company suspended its expansion into new markets outside of
California and announced the Restructuring Plan, in part, for the purpose of
closing underperforming stores in its expansion markets. As of February 27,
1999, the Company has closed 3 stores in the greater Chicago and Minneapolis
markets and 1 each in the Washington, D.C. and Nevada markets, commenced
closing its remaining store in the Washington, D.C. market and plans to close
1 more store in the greater Chicago market.

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primarily occur, over the next three years, in markets that are contiguous or
in proximity of its core California markets. Management believes that it can
better leverage the Strouds name in these markets. While this name
recognition will assist in supporting the introduction of the Strouds stores,
the geographic proximity to California will offer logistical economies in
terms of distribution and management.

Strouds establishes construction budgets for store development. These budgets
assist in achieving a level of capital investment suitable for a particular
store's location and to meet the planned return on investment goal. The
Company relies heavily on local contractors, who may be inadequately
capitalized or understaffed. The inability or failure of one or more local
contractors to perform may result in construction delays and increased costs.

Superstore Format

The Company has completed the conversion of its original format stores to the
superstore format. Additionally, the Company expects to open new superstores.
Management believes that the superstore format enables it to maintain a
competitive presence in the markets in which it operates. However, this store
format requires a substantially higher investment for store fixtures,
leasehold improvements and inventory. Because of the larger size of the
superstore, the Company incurs higher operating costs for rent. As a result,
although the Company's occupancy costs per square foot have not risen
significantly, occupancy costs as a percentage of sales have increased. This
factor has adversely affected the Company's gross profit margin, which
includes buying, occupancy and distribution expense. Other operating expenses
of the superstore format are greater than those of the Company's outlet and
original format stores such as payroll, utilities and maintenance expenses.
As a result of the increased operating costs and expenses, the Company must
achieve higher sales volumes for superstores to become profitable and meet its
performance requirements. Failure to achieve such increased sales volumes
could result in lower operating margins or, if the sales shortfall is severe,
store operating losses.

Competition

The market for home textiles is fragmented and highly competitive. The
Company competes with many different types of retailers that sell many or most
of the items sold by the Company. The home textiles industry is extremely
competitive as several specialty retailers are in the process of expanding
into new markets, including the Company's core market in California. In
addition, the Company faces extreme competition in the new markets that it has
entered. If any of the Company's major competitors seek to gain or retain
market share by reducing prices, the Company may be required to reduce its
prices in order to remain competitive, which may have the effect of reducing
its profitability. Existing competition in the new markets that the Company
has or will enter may inhibit the ability of its new stores to mature at a
rate experienced in the past in its California markets.

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Seasonality and Quarterly Fluctuations

The Company's business is subject to seasonal and quarterly fluctuations.
Historically, the Company has realized a higher proportion of its net sales
and an even greater proportion of its profits in the months of November,
December and January. Additionally, the timing of promotional events may
affect the Company's results in different quarters from year to year. The
Company may encounter different seasonality factors as it enters new markets
outside of California. The timing of new store openings and related
preopening expenses, and the amount of net sales contributed by new and
existing stores, may also cause the Company's quarterly results of operations
to fluctuate.

Support Systems

To manage the Company's existing store operations and its expansion strategy,
the Company relies heavily on its support systems and continually evaluates
the adequacy of such systems including store management, financial controls,
distribution and management information systems. There can be no assurance
that the Company will anticipate all of the changing demands which operations
will impose on the Company's support systems. Failure to alter its internal
systems or procedures as required could adversely affect the Company.

Management Information Systems and Year 2000

The Company has conducted a comprehensive review of its computer systems to
identify those systems that could be affected by the "Year 2000" (or "Y2K")
issue and has developed an implementation plan to resolve the issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The Year 2000 issue is
believed to affect virtually all companies and organizations, including the
Company. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.

The Company is reliant on computer-based technology and utilizes a variety of
proprietary and third-party applications. The Company's retail functions, such
as merchandise procurement and distribution, inventory control and
point-of-sale transactions, generally use third-party applications, with
proprietary additions to fit unique business requirements. Failure in these
key areas could impact the Company's ability to transact business in an
efficient manner. The Company is also dependent on a number of key vendors
using similar technology for ongoing timely and consistent delivery of
merchandise to support retail operations. A significant disruption in the
flow of key items into stores could also negatively impact results. To a much
lesser degree, the Company also relies on certain "imbedded processor" systems
for communications, security and other basic process control functions, the
complete failure of which could also impact operations.

In fiscal 1998, the Company spent approximately $1.4 million for the purpose
of installing new merchandise, distribution and financial software. This

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major effort included complete replacement of the previously used mainframe
computer systems and modified third-party software with Y2K-certified hardware
and software in fiscal 1998 as well as upgrading all in-store point-of-sale
computer systems to be Y2K-compliant. These efforts have been substantially
completed with installation and testing of the mainframe systems for
merchandising, accounting, distribution and inventory control prior to the end
of fiscal 1998, and the completion of the in-store system upgrades which will
be installed in every retail store in the first quarter of fiscal 1999. The
Company anticipates spending approximately $0.2 million in fiscal 1999 for
additional upgrades to these systems. Arrangements with other key providers
for payroll, voice and data communications, credit card and check processing
and non-critical software packages are currently being completed to assure Y2K
compatibility by July 1999. Based upon the compliance levels of the critical
software and hardware currently installed or being installed, the Company
expects to be fully compliant well in advance of the potential for business
impact from the Y2K transition. Nonetheless, a formal reassessment based upon
integrated simulation of all Company systems will be undertaken in the second
quarter of fiscal 1999 to verify readiness. If the modifications and
conversions to the Company's computer systems are not completed in a timely
manner, the Year 2000 problem may have a material impact on the operations of
the Company. Such material impacts could require the Company to manually
record sales, issue purchases orders to suppliers, pay invoices from vendors
and maintain its books and records for a period of time.

Y2K compliance of the Company's key vendors has been assessed through
individual surveys completed in fiscal 1998, and will be tested in the first
quarter of fiscal 1999 with electronic data interchange transmission of
Y2K-specific order and financial information. An assessment of potential
problem relationships will be reviewed in the second quarter of fiscal 1999
for further follow-up activity. The Company expects to deal with any
remaining "at-risk" systems or supplier issues and develop appropriate
contingency plans in the third quarter of fiscal 1999. These contingency
plans may include such actions as making alternate supplier arrangements,
rescheduling deliveries, or utilizing alternate methods of operation during
this critical period.

Notwithstanding that the Company has been proceeding diligently with the
implementation of its own compliance program, including aspects thereof
directed to ascertaining Year 2000 compliance by third-parties, there can be
no assurance that the Company's operations will not experience disruptions due
to the failure of third parties (including software, data processing, and
other vendors) with which the Company has commercial relationships to become
fully Year 2000 compliant in a timely manner. In the worst case, the Company
may experience extensive delays in merchandise shipments from suppliers and
therefore experience high levels of out-of-stock goods in its stores. Such
out-of stock scenarios could have a material impact on sales and related
profits for an unspecified period of time and accordingly, cause an adverse
change in the Company's stock price to occur.

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Reliance on Key Personnel

The Company is dependent on the services of its Chairman, President and Chief
Executive Officer, Charles R. Chinni. The Company has an employment contract
with Mr. Chinni ending on February 28, 2001. The loss of services of Mr.
Chinni or other key officers or employees could have a material adverse effect
on the Company's operations. In addition, there can be no assurance that the
Company will be able to attract and retain additional key personnel with the
skills and expertise to manage its operations.

Business Disruption / Geographic Concentration

The Company's corporate headquarters, principal distribution facility and the
majority of its stores are located in California, a state known for seismic
activity. Operating results could be materially affected by a significant
earthquake if such an event should occur in a geographic area where there is a
concentration of stores. In addition, there can be no assurance that
operating results would not be permanently affected due to such an event.

Anti-Takeover Effect of Certain Provisions of the Company's Certificate of
Incorporation and Bylaws

Certain provisions of the Company's Restated Certificate of Incorporation (the
"Certificate") and Restated Bylaws (the "Bylaws"), as well as Delaware
corporate law, may be deemed to have anti-takeover effects and may delay,
defer or prevent a takeover attempt that a stockholder might consider to be in
the stockholder's best interest. These provisions (i) provide that only the
Board of Directors or Chief Executive Officer of the Company may call special
meetings of the stockholders and that stockholders may not act by written
consent, (ii) establish certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to be
considered at stockholders' meetings and (iii) restrict certain business
combinations with interested stockholders. The Board of Directors of the
Company has the authority of issue preferred stock in one or more series
without the approval of the holders of the Common Stock, par value $0.0001 per
share "Common Stock." In certain circumstances, the fact that provisions are
in place which inhibit or discourage takeover attempts could reduce the market
value of the Common Stock.

Volatility of Stock Price

The Company's Common Stock began trading on the Nasdaq Stock Market on October
12, 1994. The market price of the shares of Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors. In addition, the stock market in recent years has experienced
significant price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of particular companies. These
fluctuations as well as a shortfall in sales or earnings compared to public
market analysts' expectations, changes in analysts' recommendations or
projections, and general economic and market conditions, may adversely affect
the market price of the Common Stock.

Page 15
<PAGE>
ITEM 2. PROPERTIES
- ----------------------

The Company leases all of its retail stores. The leases expire at various
dates principally between 1999 and 2014. The average new lease is 10 years,
and generally has multiple five-year renewal options. Each store lease is
negotiated individually. Lease terms usually include a fixed minimum rent
plus a percentage of sales in excess of a specified amount. A proportionate
share of certain operating costs such as common area maintenance, utilities,
insurance, and taxes are typically paid by tenants.

The table below sets forth certain information concerning the Company's stores
at the end of fiscal 1998:

State Superstore Outlet Total
----- ---------- ------ -----
California 38 17 55
Illinois 5 -- 5
Minnesota 2 -- 2
Nevada 2 -- 2
Maryland 1 -- 1
--- --- ---
Total 48 17 65
=== === ===

The Company leases its corporate offices (approximately 40,000 square feet) in
City of Industry, California and its distribution center (approximately
100,000 square feet) in Walnut, California.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------

The Company is not a party to any material legal proceeding and is not aware
of any pending or threatened litigation that, if decided adversely to the
Company, would have a material adverse effect upon the Company's business,
results of operations or financial condition.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.

Page 16
<PAGE>
PART II
-------

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

Stroud's Common Stock is listed on the Nasdaq Stock Market under the symbol
"STRO." On May 7, 1999, there were approximately 1,925 stockholders of the
Company, including beneficial stockholders whose stock is held in nominee or
street name by brokers. The table below sets forth the high and low sales
prices for Strouds' Common Stock as reported by the Nasdaq Stock Market during
the fiscal periods specified:

Fiscal Year 1998 High Low
- ---------------- ------ ------
First Quarter $ 3 15/16 $ 1 5/8
Second Quarter 3 1/2 2 3/8
Third Quarter 2 1/2 1 13/32
Fourth Quarter 2 1/8 1 1/4

Fiscal Year 1997 High Low
- ---------------- ------ ------
First Quarter $ 3 3/4 $ 1 5/8
Second Quarter 2 3/8 1 11/16
Third Quarter 3 3/8 1 7/8
Fourth Quarter 2 11/16 1 1/8

The Company has never declared or paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Credit Facility effectively prohibits the payment of cash
dividends by the Company.

On November 17, 1995, the Board of Directors of the Company declared a
dividend of one preferred stock purchase right (the "Rights") for each share
of Common Stock outstanding at the close of business on November 30, 1995.
Each Right will entitle the registered holder thereof, after the Rights become
exercisable and until November 17, 2005 (or the earlier redemption, exchange
or termination of the Rights), to purchase from the Company one one-hundredth
of a share of Series B Junior Participating Preferred Stock, par value $0.0001
per share ("Preferred Stock"), at a price of $30.00 per one one-hundredth of a
Preferred Share, subject to certain anti-dilution adjustments. The Rights
also, under certain conditions, entitle the holders to purchase $60.00 worth
of Common Stock for $30.00. The Rights expire on November 17, 2005, unless the
Company decides to redeem them earlier at $0.01 per Right or upon the
occurrence of certain events.

Page 17
<PAGE>
group of affiliated or associated Persons who has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the Common Stock), or
(ii) the 10th day after a Person or group commences, or announces an intention
to commence, a tender or exchange offer, the consummation of which would
result in the beneficial ownership by a Person or group of 15% or more of the
Common Stock; provided, however, that BT Capital Partners, Inc. (f.k.a. BT
Capital Corporation) ("BT Capital") will not be an Acquiring Person unless and
until BT Capital acquires beneficial ownership of any Common Stock on or after
December 17, 1995.

Page 18
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
STROUDS, INC.
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE
AND OPERATING DATA 1998 1997 1996 1995(1) 1994
- ------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net sales $227,571 $221,828 $209,778 $190,316 $174,585
Operating income (loss) $ 2,990 $ (918) $(22,766) $ 4,754 $ 7,647
Net income (loss) $ 214 $ (3,798) $(21,968) $ 2,570 $ 3,019

Basic
Net income (loss) per share $ 0.02 $ (0.44) $ (2.58) $ 0.31 $ 0.50
Weighted average common shares
outstanding 8,597 8,553 8,521 8,409 5,878

Diluted
Net income (loss) per share $ 0.02 $ (0.44) $ (2.58) $ 0.30 $ 0.47
Weighted average common shares
outstanding(2) 8,889 8,553 8,521 8,622 6,357

OPERATING DATA:
Stores at end of period:
Superstores 48 49 53 51 45
Outlet stores 17 17 14 10 9
-------- -------- -------- -------- --------
65 66 67 61 54
======== ======== ======== ======== ========

Total square footage at end of
period 1,012,674 1,042,704 1,050,080 850,858 664,319
Comparable store net sales
increase (decrease)(3) 3.3% 0.3% 0.1% (3.4)% 5.4%

BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 30,612 $ 36,723 $ 44,663 $ 42,879 $ 31,264
Total assets $ 96,443 $101,078 $112,104 $ 94,007 $ 83,185
Long-term debt, including
current maturities $ 27,511 $ 30,031 $ 32,693 $ 12,683 $ 1,367
Stockholder's equity $ 30,117 $ 29,839 $ 33,573 $ 55,469 $ 52,272
</TABLE>
(1) 53 weeks

(2) Includes as common equivalent shares the shares of Common Stock issuable
upon exercise of the warrants and outstanding employee stock options,
unless antidilutive.

(3) A new store or a converted or expanded store becomes comparable after it
has been open under the same format for 13 months. Comparable store net
sales are calculated by comparing new sales for comparable stores on a
fiscal month basis in the respective periods.
Page 19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ------------------------------------------------------------------------

STROUDS, INC.

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

OVERVIEW

The following sets forth certain factors that have affected the Company's
results of operations and management believes may continue to affect the
Company in the future. The Company defines its fiscal year as the period in
which most of the business activity occurs (e.g., the year ending February 27,
1999 is referred to as fiscal 1998).

Prior Expansion Strategy

Restructuring and Asset Impairment

Primarily as a result of the factors noted above, the Company initiated a
comprehensive restructuring and cost reduction plan (the "Restructuring

Page 20

<PAGE>
Plan"), resulting in a pretax charge of $16.3 million in fiscal 1996. The
Restructuring Plan is designed to improve the operating performance of the
Company through the closure or disposition of certain underperforming stores,
elimination of underperforming merchandise categories and implementation of
cost reduction measures, including workforce reductions, to more closely align
the Company's cost structure with future expected revenues. Since the
initiation of the Restructuring Plan, the Company has closed 5 stores in its
expansion markets noted above and 2 stores in California as of February 27,
1999. The Company plans to close 2 additional stores in its expansion markets
as noted above.

Future Expansion

Page 21
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth selected statements of operations data
expressed as a percentage of net sales for the period indicated:

February 27, February 28, March 1,
Fiscal year ended 1999 1998 1997
- --------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy 71.9 73.6 71.8
------ ------ ------
Gross profit 28.1 26.4 28.2
Selling and administrative expenses 26.7 26.7 30.3
Restructuring costs --- --- 8.7
Amortization of intangibles 0.1 0.1 0.1
------ ------ ------
Operating income (loss) 1.3 (0.4) (10.9)
Other income 0.1 0.1 0.1
Interest expense, net (1.3) (1.6) (0.9)
------ ------ ------
Income (loss) before income taxes 0.1 (1.9) (11.7)
Income taxes --- 0.2 1.2
------ ------ ------
Net income (loss) 0.1% (1.7%) (10.5%)
====== ====== ======

Fiscal 1998 Compared To Fiscal 1997

Net sales for fiscal 1998 increased $5.8 million, or 2.6%, to $227.6 million
versus $221.8 million in fiscal 1997. Comparable store sales increased $7.1
million, or 3.3%, for the period. Sales from new stores and expanded or
replacement stores increased by $3.9 million. Sales were reduced by $5.2
million due to 6 store closures, 3 in fiscal 1998 and 3 in fiscal 1997.

Net sales for superstores in fiscal 1998 increased $3.6 million, or 1.9%, to
$190.4 million versus $186.8 million in fiscal 1997. Comparable superstore
sales increased $5.7 million, or 3.1%, for the period. Outlet store net sales
in fiscal 1998 increased $2.2 million, or 6.2%, to $37.2 million versus $35.0
million in fiscal 1997. Comparable outlet store sales increased $1.4 million,
or 4.7%, for the period.

Management believes that the increase in comparable superstore and outlet
store sales over the same period a year ago can be attributable to the
Company's increased promotional efforts, a strong California economy where the
majority of the Company's stores are located and a favorable impact related to
fewer competitive openings. Approximately 10.8% of the comparable stores were
affected by new competitive openings for fiscal 1998 compared to approximately
21.2% for the same period last year.

Cost of sales, buying and occupancy for fiscal 1998 were $163.6 million versus

Page 22
<PAGE>
$163.2 million for the same period a year ago, a $0.4 million increase. This
dollar increase was attributable, primarily, to the increased sales volume
over fiscal 1997. As a percent of net sales, cost of sales, buying and
occupancy decreased to 71.9% from 73.6% for the same period a year ago. The
improved gross profit percentage was primarily due to the favorable impact of
increased sales volume on occupancy costs for existing stores, rent reductions
and the decrease of occupancy costs from the closure of 6 stores over the past
two fiscal years.

Selling and administrative expenses for fiscal 1998 increased $1.4 million to
$60.7 million versus $59.3 million for the same period in fiscal 1997 and
remained constant as a percentage of net sales at 26.7% for the same period a
year ago. The dollar increase was primarily the result of increased
administrative labor staffing and expense recognition for newly established
employee incentive plans. In addition, the Company incurred costs of $0.7
million in fiscal 1998 related to the pursuit of a strategic acquisition
opportunity. The costs primarily consisted of consulting and legal
expenditures.

The Company had operating income for fiscal 1998 of $3.0 million versus an
operating loss of $0.9 million for the same period a year ago, a $3.9 million
improvement, as a result of the factors noted above.

Operating income for superstores in fiscal 1998 was $2.3 million versus an
operating loss of $0.9 million in fiscal 1997. Operating income for the
outlet stores was $0.7 million in fiscal 1998 versus no operating income in
fiscal 1997. The increases in operating profit for the segments were a result
of the various factors discussed above.

Interest expense, net, decreased $0.6 million to $3.0 million for fiscal 1998
versus $3.6 million in fiscal 1997. The decrease was primarily the result of
lower average borrowings and a lower average interest rate during fiscal 1998.

The Company recorded no income tax expense associated with its income for
fiscal 1998. For fiscal 1997, the Company recognized a tax benefit of $0.5
million. The income tax benefit for fiscal 1997 was due to the carryback of
fiscal 1997 tax losses to prior years resulting in a refund of prior years'
income taxes.

Fiscal 1997 Compared To Fiscal 1996

Net sales for fiscal 1997 increased $12.0 million, or 5.7%, to $221.8 million
versus $209.8 million in fiscal 1996. The increase in net sales was primarily
the result of new store openings. Comparable store sales increased $0.5
million, or 0.3%, for the period. The Company believes that approximately
21.2% of the comparable stores were affected by new competitive openings for
fiscal 1997 compared to approximately 17.9% for fiscal 1996. Sales from new
stores and expanded or replacement stores increased by $17.3 million. Sales
were reduced by $5.8 million due to 3 store closures.

Page 23

<PAGE>
Net sales for superstores in fiscal 1997 increased $7.6 million, or 4.2%, to
$186.8 million versus $179.2 million in fiscal 1996. The increase was
primarily due to new stores. Comparable superstore sales increased $0.4
million, or 0.2%, for the period. Outlet store net sales in fiscal 1997
increased $4.5 million, or 14.6%, to $35.0 million versus $30.5 million in
fiscal 1996. This increase was primarily due to the conversion of 4
superstores to outlet stores. Comparable outlet store sales increased $0.1
million, or 0.6%, for the period.

Cost of sales, buying and occupancy for fiscal 1997 were $163.2 million versus
$150.6 million for fiscal 1996, a $12.6 million increase. This dollar
increase was attributable, primarily, to new and expanded stores. As a
percent of net sales, cost of sales, buying and occupancy increased to 73.6%
from 71.8% for fiscal 1996. The reduced gross profit was due to a higher level
of markdown volume versus the prior year in an effort to reduce inventory
levels chain wide. Additionally, higher occupancy costs associated with new
and expanded stores, where average store sales were lower, reduced gross
profit margin.

Selling and administrative expenses for fiscal 1997 decreased $4.3 million to
$59.3 million versus $63.6 million for fiscal 1996 and decreased as a
percentage of net sales from 30.3% to 26.7%. This decrease as a percentage of
net sales was primarily due to reduced advertising expense, a result of less
television advertising in all of the Company's markets and continuing expense
control programs associated with the Company's restructuring efforts. General
and administrative expense as a percent of sales was 5.3% versus 6.0% in the
prior year. The improvement as a percent of sales was primarily the result of
workforce reductions, deferring the filling of open staff positions and other
expense-saving measures associated with the Company's restructuring
activities.

In the fourth quarter of fiscal 1996, the Company incurred restructuring and
asset impairment charges of $18.1 million. This included a pretax charge of
$16.3 million for a comprehensive Restructuring Plan. During fiscal 1997, the
Company closed 3 locations and finalized plans to close 2 additional locations
in fiscal 1998. Management continues to evaluate the remaining
underperforming stores contemplated in the Restructuring Plan and will
continue to operate these stores, where appropriate, in the current format or,
if circumstances warrant, convert to an outlet format in order to improve cash
flow and minimize the ultimate cost of disposition. Accordingly, future
earnings may be negatively impacted as a result of operating underperforming
stores until the Restructuring Plan is completed. Cash outflow related to the
3 locations closed during 1997 and 2 locations currently being closed was $3.5
million for fiscal 1997. The cash outflow was primarily related to lease
termination costs, teardown expenses, consulting and advisory expenses and
employee severance and related costs. In addition, during the fourth quarter
of fiscal 1996, the Company recorded a pretax charge of $1.8 million for the
impairment of certain operating assets. The principal factors leading up to
the charge were current and future operating losses on individual operating
assets, whereby the carrying value of certain operating assets exceeded the
current estimate of future cash flows from the related asset. The Company

Page 24

<PAGE>
will continually evaluate the performance of its operating assets for the
factors noted above and, if conditions warrant, write-down the value of such
assets commensurate with the current and estimated future operating
performance.

As a result of the factors noted above, the Company had an operating loss for
fiscal 1997 of $0.9 million versus an operating loss of $22.8 million for
fiscal 1996. Excluding charges related to the Restructuring Plan and the
impairment of certain assets, the operating loss for fiscal 1996 would have
been $4.7 million.

Operating loss for superstores in fiscal 1997 was $0.9 million versus $4.9
million in fiscal 1996. The outlet stores had no operating income in fiscal
1997 versus an operating income of $0.1 million in fiscal 1996. The decrease
in operating loss for the segments was a result of the various factors
discussed above.

Interest expense, net, increased $1.8 million to $3.6 million for fiscal
1997 versus $1.8 million in fiscal 1996. Interest expense increased as a
result of higher average outstanding borrowings and a higher cost of capital
during fiscal 1997. The higher average balances resulted from borrowings in
fiscal 1996 for working capital and new store development activities which
were outstanding for the entire year in fiscal 1997 versus a partial year in
fiscal 1996.

The Company recognized a tax benefit for fiscal 1997 of $0.5 million versus
$2.5 million for the same period a year ago. The income tax benefit for
fiscal 1997 is due to the carryback of current-year tax losses to prior years
resulting in a refund of prior years' income taxes.

LIQUIDITY AND CAPITAL RESOURCES

On March 27, 1998, the Company entered into a new revolving credit agreement
with a new lender (the "Credit Facility") and commenced borrowings under the
Credit Facility. Concurrently, the Company's previous revolving credit
facility was paid off and terminated. The borrowing limit under this Credit
Facility is the lesser of $50.0 million or the sum of 85% of eligible accounts
receivable plus the lesser of 75% of eligible inventory or 90% of appraised
net liquidation value of inventory.

The Company's capital requirements are primarily for inventory purchases,
store expansion and refurbishment activities and systems development. The
Company has historically financed its operations primarily with internally
generated funds and its credit facility. At February 27, 1999, the Company's
working capital was $30.6 million, while advances from its Credit Facility
were $25.8 million. The Company had $17.3 million available for borrowings
under its Credit Facility as determined by the Company's eligible "borrowing
base," as described above, at February 27, 1999.

Page 25
<PAGE>
Net cash provided by operating activities for fiscal 1998 was $5.6 million
versus $2.2 million in fiscal 1997. Cash flows from operating activities
increased by $3.4 million primarily due to the improved operating performance
for fiscal 1998 versus fiscal 1997. During fiscal 1998, inventory decreased
$3.2 million as a result of operating 1 less store than at the end of fiscal
1997, inventory liquidations and improved inventory management. Accounts
payable and accrued expenses increased $2.8 million and the restructuring
reserve decreased by $6.5 million. Additionally, for fiscal 1998, cash flow
from operating activities included a refund of $1.1 million for federal income
taxes.

Net cash used in investing activities for fiscal 1998 was $5.2 million. Net
cash used was for capital expenditures consisting of 2 new store openings,
improvements to its distribution and warehouse facility, management
information systems development and existing store refurbishments and
remodels.

The Company's capital expenditures for fiscal 1999 are currently expected to
be approximately $5.0 million related primarily to new store development,
existing store expansions and refurbishments and improvements to its
management information systems.

Management believes that funds generated from operations, its Credit Facility
and use of trade credit will be sufficient to satisfy the Company's working
capital requirements and commitments for capital expenditures through fiscal
1999.

Net cash used in financing activities for fiscal 1998 of $0.6 million was
primarily attributable to the timing of vendor payments.

YEAR 2000

Page 26
<PAGE>
merchandise to support retail operations. A significant disruption in the
flow of key items into stores could also negatively impact results. To a much
lesser degree, the Company also relies on certain "imbedded processor" systems
for communications, security and other basic process control functions, the
complete failure of which could also impact operations.

In fiscal 1998, the Company spent approximately $1.4 million for the purpose
of installing new merchandise, distribution and financial software. This
major effort included complete replacement of the previously used mainframe
computer systems and modified third-party software with Y2K-certified hardware
and software in fiscal 1998 as well as upgrading all in-store point-of-sale
computer systems to be Y2K-compliant. These efforts have been substantially
completed with installation and testing of the mainframe systems for
merchandising, accounting, distribution and inventory control prior to the end
of fiscal 1998, and the completion of the in-store system upgrades which will
be installed in every retail store in the first quarter of fiscal 1999. The
Company anticipates spending approximately $0.2 million in fiscal 1999 for
additional upgrades to these systems. Arrangements with other key providers
for payroll, voice and data communications, credit card and check processing
and non-critical software packages are currently being completed to assure Y2K
compatibility by July 1999. Based upon the compliance levels of the critical
software and hardware currently installed or being installed, the Company
expects to be fully compliant well in advance of the potential for business
impact from the Y2K transition. Nonetheless, a formal reassessment based upon
integrated simulation of all Company systems will be undertaken in the second
quarter of fiscal 1999 to verify readiness. If the modifications and
conversions to the Company's computer systems are not completed in a timely
manner, the Year 2000 problem may have a material impact on the operations of
the Company. Such material impacts could require the Company to manually
record sales, issue purchases orders to suppliers, pay invoices from vendors
and maintain its books and records for a period of time.

Page 27

<PAGE>
may experience extensive delays in merchandise shipments from suppliers and
therefore experience high levels of out-of-stock goods in its stores. Such
out-of stock scenarios could have a material impact on sales and related
profits for an unspecified period of time and accordingly, cause an adverse
change in the Company's stock price to occur.

INFLATION

The Company does not believe that inflation has had or will have a material
adverse effect on net sales or results of operations. The Company has
generally been able to pass on increased costs through increases in selling
prices.

SEASONALITY AND QUARTERLY FLUCTUATIONS

CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not related to
historical results are forward-looking statements. The statements are made a
number of times throughout the document and may be identified by such forward-
looking terminology as "expect," "believe," "may," "will," "intend" or similar
statements or variations of such terms. Actual results may differ materially
from those projected or implied in the forward-looking statements. Further,
certain forward-looking statements are based upon assumptions of future events
which may not prove to be accurate. These forward-looking statements involve
risks and uncertainties including levels of sales, store traffic, acceptance
of product offering and fashions, competitive pressures from other superstore
retailers and from department stores which carry other products including
certain designer products not carried by the Company's stores, availability of
future store locations and schedule of store expansion plans. These and other
important factors that may cause actual results to differ materially from such
forward-looking statements are more fully described in Item 1, Part I of the
Company's Annual Report on Form 10-K for the Fiscal Year Ended February 27,
1999. You are urged to consider such factors. The Company assumes no
obligation for updating any such forward-looking statements.

Page 28

<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------

The Company's $50 million Credit Facility has interest payable at a rate
equivalent to the Chase Manhattan Bank Rate plus 0.25% per annum or LIBOR plus
2.50% per annum (8.00% and 7.44% at February 27, 1999, respectively). Changes
in interest rates which dramatically increase the interest rate on the credit
facility would make it more costly to borrow proceeds under that facility and
may impede the Company's growth strategies if management determines that the
costs associated with borrowing funds are too high to implement these
strategies.

The Company does not hold derivative investments and does not earn foreign-
source income. All of the Company's revenues are realized in dollars and
almost all of the revenues are from customers in the United States.
Therefore, the Company does not believe that it has any significant direct
foreign currency exchange risk.

Page 29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

STROUDS, INC.
STATEMENTS OF OPERATIONS

FISCAL YEAR ENDED
----------------------------------------
February 27, February 28, March 1,
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998 1997
- ------------------------------------ ---------- ---------- -----------

Net sales $ 227,571 $ 221,828 $ 209,778
Costs and expenses:
Cost of sales, buying and
occupancy 163,628 163,198 150,625
Selling and administrative
expenses 60,695 59,290 63,611
Restructuring and asset
impairment charges --- --- 18,050
Amortization of excess of cost
over net assets acquired 258 258 258
---------- ---------- ----------
224,581 222,746 232,544
---------- ---------- ----------

Operating income (loss) 2,990 (918) (22,766)

Other income 254 248 156
Interest expense, net (3,030) (3,598) (1,846)
---------- ---------- ----------
Income (loss) before income
taxes 214 (4,268) (24,456)

Income tax (expense) benefit 0 470 2,488
---------- ---------- ----------
Net income (loss) $ 214 $ (3,798) $ (21,968)
========== ========== ==========

Per share of common stock:

Basic:
- ------
Net income (loss) per share: $ 0.02 $ (0.44) $ (2.58)
========== ========== ==========
Weighted average shares outstanding 8,597 8,553 8,521
========== ========== ==========
Diluted:
- --------
Net income (loss) per share: $ 0.02 $ (0.44) $ (2.58)
========== ========== ==========
Weighted average shares outstanding 8,889 8,553 8,521
========== ========== ==========

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Page 30
<PAGE>
STROUDS, INC.
BALANCE SHEETS

FEBRUARY 27, FEBRUARY 28,
IN THOUSANDS, EXCEPT SHARE DATA 1999 1998
- --------------------------------- -------- --------
ASSETS
Current assets:
Cash $ 269 $ 518
Accounts receivable 1,763 1,650
Inventory 60,832 64,002
Prepaid expenses 3,554 3,513
Income taxes receivable --- 1,078
Deferred income taxes 439 439
-------- --------
Total current assets 66,857 71,200
Property and equipment - at cost, net of
accumulated depreciation and amortization 21,354 21,422
Excess of cost over net assets acquired, net of
accumulated amortization 7,273 7,531
Other assets 959 925
-------- --------
Total assets $ 96,443 $101,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 624 $ 567
Accounts payable 15,565 13,509
Accrued expenses 15,726 13,154
Current portion of restructuring reserves 4,330 7,247
-------- --------
Total current liabilities 36,245 34,477
Long-term debt 26,887 29,464
Restructuring reserves --- 4,121
Other non-current liabilities 3,194 3,177
-------- --------
Total liabilities 66,326 71,239
-------- --------
Stockholders' equity:
Preferred stock, $0.0001 par value; authorized
750,000 shares, no shares issued or
outstanding --- ---
Preferred stock, Series B, $0.0001 par value;
authorized 250,000 shares; no shares issued
or outstanding --- ---
Common stock, $0.0001 par value; authorized
25,000,000 shares; issued and outstanding
February 27, 1999, 8,624,131 shares; and
February 28, 1998, 8,579,022 shares 1 1
Additional paid-in capital 39,146 39,082
Accumulated deficit (9,030) (9,244)
-------- --------
Total stockholders' equity 30,117 29,839
-------- --------
Total liabilities and stockholders' equity $ 96,443 $101,078
======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Page 31
<PAGE>
STROUDS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings Total
-------------- paid-in (accumulated stockholders'
IN THOUSANDS Shares Amount capital deficit) equity
- -------------------------- ------ ------ ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, March 2, 1996 8,512 $ 1 $38,946 $16,522 $55,469

Net loss --- --- --- (21,968) (21,968)
Common stock issued through 1994
Employee Stock Purchase Plan 24 --- 72 --- 72
----- ---- ------- ------- -------
Balance, March 1, 1997 8,536 1 39,018 (5,446) 33,573

Net loss --- --- --- (3,798) (3,798)
Common stock issued through 1994
Employee Stock Purchase Plan 43 --- 64 --- 64
----- ---- ------- ------- -------
Balance, February 28, 1998 8,579 $ 1 $39,082 $(9,244) $29,839

Net income --- --- --- 214 214
Common stock issued through 1994
Employee Stock Purchase Plan 44 --- 62 --- 62
Common stock issued upon
exercise of stock options 1 --- 2 --- 2
----- ---- ------- ------- -------
Balance, February 27, 1999 8,624 $ 1 $39,146 $(9,030) $30,117
===== ==== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Page 32

<PAGE>
<TABLE>
<CAPTION>
STROUDS, INC.
STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
-------------------------------
February 27, February 28, March 1,
IN THOUSANDS 1999 1998 1997
- ------------------------------------ --------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 214 $ (3,798) $(21,968)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 4,749 4,755 4,476
Loss on abandonment of fixed assets --- 165 ---
Amortization of excess of cost over net assets
acquired 258 258 258
Deferred income taxes --- 915 (451)
(Increase) decrease in:
Accounts receivable (113) 307 (122)
Inventory 3,170 5,764 (9,768)
Prepaid expenses (41) (1,678) 1,625
Income taxes receivable 1,078 1,410 (2,488)
Increase (decrease) in:
Accounts payable and accrued expenses 2,803 (2,286) 4,579
Restructuring reserve (6,485) (3,524) 18,050
Other (17) (91) 1,123
--------- -------- --------
Net cash provided by (used in) operating
activities 5,616 2,197 (4,686)
--------- -------- --------
Cash flows from investing activities:
Capital expenditures (5,233) (2,428) (13,372)
Other --- 2 83
--------- -------- --------
Net cash used in investing activities (5,233) (2,426) (13,289)
--------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) under long-term debt-net (2,521) (2,616) 20,247
Principal payments under capital lease obligations --- (46) (237)
Increase (decrease) in overdraft 1,825 2,580 (1,552)
Other equity transactions 64 64 72
--------- -------- --------
Net cash (used in) provided by financing
activities (632) (18) 18,530
--------- -------- --------
Net (decrease) increase in cash (249) (247) 555
Cash at beginning of period 518 765 210
--------- -------- --------
Cash at end of period $ 269 $ 518 $ 765
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,984 $ 3,385 $ 1,839
========= ======== ========
Income taxes $ --- $ 28 $ 59
========= ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
Page 33
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY

Strouds, Inc. ("Strouds" or the "Company"), a Delaware corporation, is a
specialty retailer of bed, bath, tabletop and other home textiles products,
decorative accessories and other selected home furnishings. At February 27,
1999, the Company operated 65 stores (48 superstores and 17 outlets) in five
states under the name Strouds.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The Company's fiscal year is based on a 52-53 week fiscal year ending on the
Saturday closest to the last day of February. The fiscal years ended February
27, 1999, February 28, 1998 and March 1, 1997 included 52 weeks.

The Company has defined its fiscal year as the period in which most of the
activity occurs (e.g., the year ending February 27, 1999 is referred to as
fiscal 1998).

Asset Impairment

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cashflows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. See note 5.

Stock Compensation

The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), and has
elected to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and comply with the pro
forma disclosure requirements of SFAS No. 123, except for options and warrants
granted to non-employees, which are accounted for under SFAS No. 123.

Page 34

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segment Information

Effective March 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and selected information in the notes thereto. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated. The Company has determined that the adoption
of SFAS No. 131 will not have a material impact upon the Company's financial
reporting. See note 12.

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the consolidated financial statements at carrying
value which approximates fair value due to the short-term nature of these
instruments. The carrying value of the Company's borrowings approximates the
fair value based on the current rates available to the Company for similar
instruments.

Use Of Estimates

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 revenues and expenses for the years then ended.
Actual results could differ from those estimates.

Inventory

Inventory is stated at the lower of cost (principally average cost) or market
as determined by the retail inventory method. Included in inventory costs for
financial reporting purposes is the capitalization of certain buying,
warehousing, storage and transportation costs. Capitalized costs in inventory
at February 27, 1999 and February 28, 1998 were $1,598,000 and $1,449,000,
respectively.

Page 35
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Depreciation And Amortization

Depreciation and amortization are provided on a straight-line basis over the
following estimated useful lives:

Furniture, fixtures and equipment 5 to 7 years
Equipment held under capital leases Term of the lease
Leasehold improvements Term of the lease or life of
the asset, whichever is shorter
(generally 7 to 10 years)

Excess Of Cost Over Net Assets Acquired

Excess of cost over net assets acquired is amortized on a straight-line basis
over its estimated useful life of 40 years. As part of an ongoing review and
evaluation of intangible assets, management assesses the carrying value of the
Company's intangible assets if facts and circumstances suggest that it may be
impaired. If this review indicates that the intangibles will not be
recoverable, as determined by an undiscounted cash flow analysis over the
remaining amortization period, the carrying value would be reduced to
estimated fair market value. Accumulated amortization amounted to $3,053,000
as of February 27, 1999 and $2,795,000 as of February 28, 1998. No writedowns
were recorded during the fiscal years ended February 27, 1999 and February 28,
1998.

Advertising Costs

The Company charges production costs of advertising to expense the first time
the advertising takes place.

Store Preopening Costs

Store preopening costs, consisting primarily of advertising, labor and
supplies directly related to the opening of specific stores, are expensed as
incurred.

Income Taxes

The Company accounts for income taxes under the asset and liability method,
whereby deferred income taxes are provided for the temporary differences
between the financial reporting basis and income tax basis of the Company's
assets and liabilities. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.

Page 36
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications

Certain reclassifications have been made to the fiscal 1997 and 1996 amounts
to conform to the fiscal 1998 presentation.

3. INCOME (LOSS) PER SHARE

The following is a reconciliation of the numerator and denominator used in the
basic and diluted earnings (loss) per share ("EPS") calculations:

February 27, February 28, March 1,
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998 1997
- ------------------------------------ ----------- ----------- ----------
Numerator:
Net income (loss) $ 214 $ (3,798) $ (21,968)

Denominator:
Basic EPS
Weighted average common shares
outstanding 8,597 8,553 8,521

Effect of dilutive securities:
Warrants and stock options 292 --- ---

Diluted EPS
Weighted average common shares
and dilutive potential common
shares outstanding 8,889 8,553 8,521
- ------------------------------------ ----------- ----------- -----------
Basic EPS $ 0.02 $ (0.44) $ (2.58)
Diluted EPS $ 0.02 $ (0.44) $ (2.58)

In fiscal 1998, options to purchase 918,000 shares of common stock, par value
$0.0001 par share, of the Company (the "Common Stock") were not included in
the computation of diluted earnings per common share because the option price
was greater than the average market price of the Common Stock during the year,
and therefore their inclusion would have been antidilutive. Options to
purchase 697,000 and 720,000 shares and warrants to purchase 213,000 and
213,000 shares of Common Stock in fiscal 1997 and 1996, respectively, were not
included in the computation of diluted earnings per common share because the
Company was in a loss position and their inclusion would have been
antidilutive.

Page 37

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

February 27, February 28,
IN THOUSANDS 1999 1998
--------------------------------- --------- ---------
Furniture, fixtures and equipment $ 44,954 $ 41,091
Equipment held under capital leases --- 2,081
Leasehold improvements 9,402 9,137
--------- ---------
54,356 52,309
Impairment valuation reserve (1,401) (1,601)
Accumulated depreciation and amortization (31,601) (29,286)
--------- ---------
$ 21,354 $ 21,422
========= =========

5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company initiated a comprehensive restructuring and cost reduction plan
(the "Restructuring Plan"), resulting in a pretax charge of $16,250,000 in
fiscal 1996. The Restructuring Plan is designed to improve the operating
performance of the Company through the closure or disposition of certain
underperforming stores, elimination of underperforming merchandise categories
and implementation of cost reduction measures, including workforce
reductions, to more closely align the Company's cost structure with future
expected revenues. The Company has closed 7 stores related to its
restructuring efforts as of February 27, 1999. The Company plans to close 2
additional stores related to its Restructuring Plan.

Cash used in fiscal 1998 related to the Restructuring Plan of $890,000 was
primarily related to lease termination costs, teardown expenses, consulting
and advisory expenses and employee severance and related costs. As of
February 27, 1999, no changes had been made to the estimated Restructuring
Plan costs and no charges were recorded to operations. The Restructuring Plan
has been substantially completed. The remaining liability is primarily for the
closure of the remaining identified stores, of which the closure terms have
yet to be determined.

Page 38

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (Continued)

The following table summarizes the Restructuring Plan charges and payments or
asset write-downs:
Payment and asset Future cash
1996 write-downs through outlays and
IN THOUSANDS Provision February 27, 1999 charges
- ---------------------------- ----------- ------------------- -----------
Occupancy, lease termination
and subsidy costs associated
with the closure or
disposition of stores $ 7,375

Asset write-down: merchandise
inventory, leasehold improve-
ments, furniture and fixtures
and equipment 7,215

Employee severance and other
related costs 1,660
---------- ---------- ----------
Total $ 16,250 $ 11,920 $ 4,330
========== ========== ==========

In fiscal 1996, the Company recorded a pretax charge of $1,800,000 for the
impairment of certain operating assets. The principal factors leading up to
the charge were current and future operating losses on individual operating
assets, whereby the carrying value of certain operating assets exceeded the
current estimate of future cash flows from the related assets. The Company
had no additional assets impaired in fiscal 1998 or fiscal 1997.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

February 27, February 28,
IN THOUSANDS 1999 1998
-------------------------------- ----------- ---------
Cash overdraft $ 4,405 $ 2,580
Salary, wages and related expense 3,629 2,397
Sales tax 1,164 1,683
Other 6,528 6,494
----------- ---------
$ 15,726 $ 13,154
=========== =========

Page 39

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

7. LONG-TERM DEBT

Long-term debt is summarized as follows:

February 27, February 28,
IN THOUSANDS 1999 1998
------------------------------------------------ ----------- --------
Revolving promissory note payable to a financial
institution, secured by inventory. The
borrowing limit is the lesser of $50,000,000
or the sum of 85% of eligible accounts
receivable plus the lesser of 75% of eligible
inventory or 90% of appraised net liquidation
value of inventory. Interest is payable at a
rate equivalent to the Chase Manhattan Bank Rate
("Bank Rate") plus 0.25% per annum or LIBOR plus
2.50% per annum (8.00% and 7.44% at February 27,
1999, respectively). The Company can lower its
interest spread up to a maximum of 0.25% and
0.50% on its Bank Rate and LIBOR borrowings,
respectively, if it achieves a certain fixed
charge coverage ratio, as defined, measured on
a quarterly rolling twelve month basis. The
revolving promissory note expires March 26, 2001
and may be renewed annually thereafter. $ 25,833 $ ---
Promissory note payable to a financial institution,
secured by equipment, fixtures and leasehold
improvements at two store locations. Interest is
payable at the rate of 9.580% per annum. The
promissory note is for five years, payable in
monthly installments beginning September 1, 1996 1,678 2,245
Revolving promissory note payable to a financial
institution, repaid during the year ended
February 27, 1999 --- 27,786
-------- --------
Total debt 27,511 30,031
Less current maturities 624 567
-------- --------
Total long-term debt $ 26,887 $ 29,464
======== ========

Page 40

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

7. LONG-TERM DEBT (Continued)

Scheduled maturities for total debt outstanding at February 27, 1999 are as
follows:

IN THOUSANDS Notes payable
------------- -------------
Fiscal year:
1999 $ 624
2000 686
2001 26,201
-------
$27,511
=======

On March 27, 1998, the Company entered into a new revolving credit agreement
with a new lender (the "Credit Facility") and commenced borrowings under the
Credit Facility. Concurrently, the Company's previous revolving credit
facility was paid off and terminated. The Company's Credit Facility contains
various restrictions on the payment of cash dividends, incurrence of
additional indebtedness, acquisitions, investments, loans, merger or
consolidation and disposition of assets. The covenants also require the
Company to meet a minimum net worth requirement at anytime the borrowing
availability is less than $5,000,000. The Company was in compliance with the
covenants at February 27, 1999.

Included in this facility is a $7,000,000 letter of credit sub-facility. At
February 27, 1999, the Company had letters of credit outstanding amounting to
$680,000 for its purchase commitments to foreign suppliers under this sub-
facility.

On September 11, 1998, the Company entered into an Interest Rate Swap
Agreement (the "New Agreement") with a financial institution. The New
Agreement was entered into for the purpose of converting a portion of its
borrowing to a long-term fixed base rate of interest. The Company converted
$10,000,000 to a weighted average fixed base interest rate of 6.03% plus 2.50%
until this New Agreement expires on March 1, 2001. In connection with the New
Agreement, the Company has issued a standby letter of credit in the amount of
$175,000 to secure the interest rate risk associated with this agreement.
Concurrently, the Company terminated its existing International Swap Dealers
Association Master Agreement (the "Agreement") which covered $20,000,000 at a
weighted average fixed base interest rate of 7.00% plus 2.50%. As a result of
terminating this Agreement, the Company incurred termination fees of $200,000.
As of February 27, 1999, the mark-to-market on the New Agreement was $113,000.

Page 41

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

8. LEASE COMMITMENTS

At February 27, 1999, the Company occupied all of its facilities under
operating leases. The leases require minimum and percentage rental payments
based on gross sales and provide that the Company pay property taxes and costs
arising from the Company's use of the leased property. The leases are
primarily for ten-year periods, and certain leases contain renewal options.
For lease agreements with scheduled rent increases during the lease term or
for rental payments commencing on a date other than the initial occupancy,
rental expense is recognized from the date of occupancy on a straight-line
basis over the lease term. Total rental expense amounted to $22,756,000,
$23,778,000 and $20,806,000 for fiscal 1998, 1997 and 1996, respectively.

The Company has operating leases for equipment. These leases are for six
month to five year periods, and certain leases contain renewal options. The
rental expense amounted to $983,000, $797,000 and $710,000 for fiscal 1998,
1997 and 1996 respectively.

Minimum rental commitments under all operating leases are as follows:

IN THOUSANDS
--------------
Fiscal year:
1999 $ 18,531
2000 16,476
2001 13,189
2002 12,124
2003 10,505
Thereafter 31,070
---------
$ 101,895
=========

Page 42
<PAGE>

STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

9. INCOME TAXES

The components of income tax expense (benefit) are as follows:

February 27, February 28, March 1,
IN THOUSANDS 1999 1998 1997
-------------- ----------- -------- ---------
Current:
Federal $ --- $(1,078) $(2,488)
State --- --- ---
------- ------- -------
Total current income tax
expense (benefit) --- (1,078) (2,488)
------- ------- -------
Deferred:
Federal --- 303 ---
State --- 305 ---
------- ------- -------
Total deferred income tax
expense --- 608 ---
------- ------- -------
Net income tax
expense (benefit) $ --- $ (470) $(2,488)
======= ======= =======

A summary of the deferred tax assets (liabilities) is as follows:

February 27, February 28,
IN THOUSANDS 1999 1998
------------------- ----------- --------
Deferred tax assets:
Inventory $ 772 $ 799
Cash versus accrual basis 4,428 6,822
Net operating loss and tax
credit carryovers 5,052 2,439
------- -------
10,252 10,060
Valuation allowance (7,950) (8,406)
------- -------
Total deferred tax assets 2,302 1,654

Deferred tax liabilities:
Property and equipment (1,863) (1,210)
Capital equipment held on lease --- (5)
------- -------
Total deferred tax liabilities (1,863) (1,215)
------- -------
Net deferred tax assets $ 439 $ 439
======= =======

Page 43
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

9. INCOME TAXES (Continued)

The reconciliation of the Federal statutory rate to the effective tax rate is
as follows:
February 27, February 28, March 1,
1999 1998 1997
----------- ----------- --------
Federal statutory rate 35.0% 35.0% 35.0%
Amortization of excess of cost
over net assets acquired 42.2 (2.1) (0.4)
Change in valuation allowance (97.5) (19.8) (30.9)
Non-deductible expenses and other 20.3 (2.1) 6.5
------- ------- -------
0.0% 11.0% 10.2%
======= ======= =======

The Company has a net operating loss carryforward of approximately $11.5
million and $7.8 million for Federal and California income taxes,
respectively. These loss carryforwards expire in fiscal years ending after
2013 and 2003, respectively.

10. STOCKHOLDERS' EQUITY

On November 17, 1995, the Board of Directors of the Company declared a
dividend of one preferred stock purchase right (the "Rights") for each share
of Common Stock outstanding at the close of business on November 30, 1995.
Each Right will entitle the registered holder thereof, after the Rights become
exercisable and until November 17, 2005 (or the earlier redemption, exchange
or termination of the Rights), to purchase from the Company one one-hundredth
of a share of Series B Junior Participating Preferred Stock, par value $0.0001
per share, at a price of $30.00 per one one-hundredth of a Preferred Share,
subject to certain anti-dilution adjustments. The Rights also, under certain
conditions, entitle the holders to purchase $60.00 worth of Common Stock for
$30.00. The Rights expire on November 17, 2005, unless the Company decides to
redeem them earlier at $0.01 per Right or upon the occurrence of certain
events.

Page 44
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

10. STOCKHOLDERS' EQUITY (Continued)

The Rights will not be exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) the 10th day after a public announcement
that a Person (broadly defined as any individual or other entity) or group of
affiliated or associated Persons has become an Acquiring Person (a Person or
group of affiliated or associated Persons who has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the Common Stock), or
(ii) the 10th day after a Person or group commences, or announces an intention
to commence, a tender or exchange offer, the consummation of which would
result in the beneficial ownership by a Person or group of 15% or more of the
Common Stock.

No event during fiscal 1998 made the Rights exercisable.

The Company issued 1,025,077 warrants to purchase shares of Common Stock
related to a prior year's financing arrangement. The warrants are exercisable
at any time at the exercise price of $0.0002 per share. As of February 27,
1999, warrants to purchase 212,850 shares of Common Stock were outstanding.

On April 19, 1999, Strouds repurchased 1,800,000 shares of its outstanding
Common Stock in a private transaction. The average cost in the repurchase was
$1.05 per share. The repurchased shares were put into the Company's treasury
stock valued at cost. Concurrently, warrants for 212,850 shares of Common
Stock were exercised.

11. EMPLOYEE BENEFITS

Strouds sponsors the Strouds Profit Sharing and Retirement Plan (the "Plan"),
a qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Plan covers substantially all full-time employees
and provides for Company matching of employee contributions, at the discretion
of the Board of Directors of the Company, up to 3% of each employee's salary.
Effective April 1997, the Company suspended matching contributions. Matching
contributions totaled $16,000 and $141,000 for fiscal 1997 and 1996,
respectively. In fiscal 1998, the Company contributed $100,000 to the profit
sharing portion of the Plan.

On May 19, 1994, the Company's Board of Directors adopted the 1994 Equity
Participation Plan ("1994 Plan") to attract and retain directors, officers and
key employees. The 1994 Plan authorizes the Compensation Committee of
the Board of Directors to issue 1,680,000 shares of Common Stock upon exercise
of options, stock appreciation rights, and other awards, or as restricted or
deferred stock awards. Under this plan, 604,076 shares are available to be
granted. The exercise price of the non-qualified stock options awarded under
the 1994 Plan is determined by the Compensation Committee and can be less than
fair market value but not less than par value ($0.0001). The Compensation
Committee can determine the period of exercisability and the vesting schedule;
however, the life of the option is limited to ten years from the date of
grant.

Page 45
<PAGE>

STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

11. EMPLOYEE BENEFITS (Continued)

There were 12,900 options outstanding at February 27, 1999 related to the
Stock Option Plan for Executives and Key Employees (the "1988 Plan"). The
1988 Plan was amended to prohibit the issuance of any additional options after
September 1, 1994.

On May 14, 1997, the Compensation Committee approved repricing all previously
granted options to current employees to $1.75 per share with credit for
accrued vesting in the option. Repriced options could not be exercised for a
period of one year from the date of repricing. The number of options
cancelled and reissued due to the repricing were 447,284.

Information with respect to the Company's option plans is summarized as
follows:
<TABLE>
<CAPTION>
February 27, February 28, March 1,
1999 1998 1997
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 909,205 $2.14 755,109 $7.06 627,759 $7.54
Granted 373,100 $2.70 1,067,434 $2.01 172,300 $4.95
Exercised (840) $1.75 --- $ -- --- $ --
Cancelled (193,481) $3.39 (913,338) $6.06 (44,950) $5.71
------- -------- ------- -------- ------- --------
Outstanding at
end of year 1,087,984 $2.11 909,205 $2.14 755,109 $7.06
======= ======== ======= ======== ======= ========
Exercisable at
end of year 245,810 133,000 261,878
======= ======= =======
Weighted-average fair
value of options
granted during
the year $2.70 $2.00 $3.13
===== ===== =====
</TABLE>

Page 46
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

11. EMPLOYEE BENEFITS (Continued)

The following table summarizes information about the stock options outstanding
at February 27, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 02/27/99 life price at 02/27/99 price
---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.38 to $ 1.44 88,300 9.20 $ 1.40 9,460 $ 1.38
1.75 to 1.75 325,384 6.94 1.75 140,440 1.75
1.78 to 1.88 315,700 8.36 1.87 78,800 1.87
2.00 to 2.88 194,050 8.97 2.49 17,110 2.10
3.00 to 3.25 164,550 9.20 3.20 --- --
---------------- ----------- ----------- -------- ----------- --------
$ 1.38 to $ 3.25 1,087,984 8.24 $ 2.11 245,810 $ 1.80
================ =========== =========== ======== =========== ========
</TABLE>

On September 1, 1994, the Company's Board of Directors adopted the 1994
Employee Qualified Stock Purchase Plan (the "Purchase Plan"). The purpose of
the Purchase Plan is to enable the Company to grant options to employees to
buy shares of its Common Stock, at a 15% discount from the then fair market
value without commissions and other charges, to attract and retain experienced
and capable employees and to help employees to further identify their
interests with those of the Company's stockholders generally. The Purchase
Plan is intended to qualify as an "employee stock purchase plan," as defined
in Section 423(b) of the Code. An aggregate of 250,000 shares of Common Stock
has been reserved for issuance under the Purchase Plan, subject to adjustment
for stock splits, stock dividends and similar events. In fiscal 1998, the
Company issued 44,269 shares under the Purchase Plan.

Page 47

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

11. EMPLOYEE BENEFITS (Continued)

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, no compensation cost has been
recognized for the stock option or stock purchase plans. Had compensation
cost for the Company's 1998, 1997 and 1996 plans been determined consistent
with SFAS No. 123, the Company's net income (loss) and net income (loss) per
share for 1998, 1997 and 1996 would approximate the pro forma amounts below:

February 27, February 28, March 1,
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998 1997
- ----------------------------------- ------------ ----------- -----------
Net income (loss):
As reported $ 214 $ (3,798) $ (21,968)
Pro forma $ (348) $ (4,153) $ (22,403)

Net income (loss) per share:
Basic
As reported $ 0.02 $ (0.44) $ (2.58)
Pro forma $ (0.04) $ (0.49) $ (2.63)

Diluted
As reported $ 0.02 $ (0.44) $ (2.58)
Pro forma $ (0.04) $ (0.49) $ (2.63)

The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted-average
assumptions:

February 27, February 28, March 1,
Weighted-average assumptions 1999 1998 1997
---------------------------- ------------ ----------- -----------
Risk-free interest rate 5.1% 6.0% 6.0%
Expected volatility 45% 45% 45%
Expected dividend yield 0% 0% 0%
Expected life (years) 9 9 9

Page 48

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

12. SEGMENT INFORMATION

In accordance with the requirements of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company's reportable
business segments and respective accounting policies, policies of the segments
are the same as those described in note 2. Management evaluates segment
performance based primarily on revenue and earnings from operations. Interest
income and expense is evaluated on a consolidated basis and not allocated to
the Company's business segments.

Segment information is summarized as follows:

February 27, February 28, March 1,
IN THOUSANDS 1999 1998 1997
- ------------------------------- ----------- ----------- ----------
Net revenue:
Superstores $ 190,390 $ 186,827 $ 179,248
Outlet stores 37,181 35,001 30,530
----------- ----------- ----------
$ 227,571 $ 221,828 $ 209,778
=========== =========== ==========
Operating income (loss):
Superstores $ 2,320 $ (946) $ (4,865)
Outlet stores 670 28 $ 149
----------- ----------- ----------
$ 2,990 $ (918) $ (4,716) (1)
=========== =========== ==========
Total assets:
Superstores $ 65,715 $ 70,686
Outlet stores 7,330 6,749
Other (2) 23,398 23,643
----------- -----------
$ 96,443 $ 101,078
=========== ===========
- ---------------------------------------------------------------------------
(1) Excludes $18,050 in restructuring and asset impairment charges in fiscal
1996.
(2) Other includes corporate and distribution center property, equipment and
assets which are not attributed to a business segment.

Page 49

<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
The results of operations for fiscal 1998 and 1997 were as follows:

First Second Third Fourth
IN THOUSANDS, EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter
- ---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1998:
Net sales $55,015 $54,190 $59,162 $59,204
Gross profit $14,678 $15,000 $17,411 $16,854
Operating income $ 106 $ 358 $ 1,196 $ 1,330
Net income (loss) $ (596) $ (366) $ 506 $ 670
Basic net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08
Diluted net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08

FISCAL 1997:
Net sales $50,451 $53,797 $56,877 $60,703
Gross profit $12,881 $14,236 $15,372 $16,141
Operating income (loss) $(2,189) $ (217) $ 269 $ 1,219
Net income (loss) $(2,999) $(1,129) $ (536) $ 866
Basic net income (loss) per share (1) $ (0.35) $ (0.13) $ (0.06) $ 0.10
Diluted net income (loss) per share (1) $ (0.35) $ (0.13) $ (0.06) $ 0.10
- ----------------------------------------------------------------------------------
(1) Net income per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
</TABLE>

Page 50
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Strouds, Inc.:

We have audited the accompanying balance sheets of Strouds, Inc. as of
February 27, 1999 and February 28, 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended February 27, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Strouds, Inc. as
of February 27, 1999 and February 28, 1998 and the results of its operations
and its cash flows for each of the years in the three-year period ended
February 27, 1999 in conformity with generally accepted accounting principles.

/s/KPMG LLP
- -----------
Los Angeles, California
April 14, 1999

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------

Not applicable.

Page 51
<PAGE>
PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

DIRECTORS

The information required by this Item is incorporated by reference to the
Company's 1999 Proxy Statement (the "Proxy Statement") under the heading
"General Information - Election of Directors."

EXECUTIVE OFFICERS

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Officers and Certain
Key Personnel."

COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance."

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the headings "Compensation of Directors" and
"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Relationships and Related
Transactions."

Page 52
<PAGE>
PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------

(a) The following documents are filed as a part of this report.

1. Financial Statements:

The following financial statements of Strouds, Inc. are included under Item 8:

Statements of Operations -
for the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997 Page 30

Balance Sheets -
as of February 27, 1999 and February 28, 1998 Page 31

Statements of Stockholders' Equity -
for the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997 Page 32

Statements of Cash Flows -
for the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997 Page 33

Notes to the Financial Statements Page 34

Independent Auditors' Report Page 51

2. Not applicable

3. Exhibits:

The exhibits on the accompanying Index to Exhibits are filed as part of, or
incorporated by reference into, this report.

Page 53

<PAGE>
Exhibit No. Description
- ----------- -----------
4 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company's Form
8-K, as filed with the Commission on December 1, 1995.
** 10.1 Stock Option Plan for Executive and Key Employees of the
Company, including the form of the individual option
agreement thereunder.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
** 10.2 Form of Amendment to Stock Option Plan for Executive and Key
Employees of the Company, including the form of the amendment
to the individual option agreement thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.3 Amended and Restated 1994 Equity Participation Plan of the
Company, including the forms of the individual option
agreements thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.4 Amendment to the Amended and Restated 1994 Equity
Participation Plan (First) dated July 6, 1995.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.5 Amendment to the Amended and Restated 1994 Equity
Participation Plan (Second) dated May 14, 1997.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.6 Third Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 20, 1998.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.7 Form of the Company's Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.8 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan dated January 5, 1995.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.

Page 54

<PAGE>
Exhibit No. Description
- ----------- -----------
10.9 Warrant Agreement (Warrant 1), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.10 Warrant Agreement (Warrant 2), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.11 Registration Rights Agreement dated as of January 2, 1996 by
and between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.12 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 31, 1996, as filed
with the Commission on October 11, 1996.
10.13 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
10.14 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated September 11,
1998.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 29, 1998, as filed
with the Commission on October 13, 1998.
10.15 Amended and Restated Employment Agreement between Charles
Chinni and Strouds, Inc., dated May 20, 1998.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 29, 1998, as filed
with the Commission on October 13, 1998.
* 23 Consent of Independent Auditors
* 27 Financial Data Schedule
- ------------------------------

* Filed herewith
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the form pursuant to Item 14(a)3 of Form 10-K.

(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last fiscal
quarter of fiscal 1998.

Page 55
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

STROUDS, INC.
(Registrant)

/s/Charles R. Chinni May 26, 1999
--------------------
Charles R. Chinni
Chairman of the Board, President
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on its behalf of the Registrant in the capacities
and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Wilfred C. Stroud Founder, Chairman Emeritus and May 26, 1999
- --------------------- Director
Wilfred C. Stroud

/s/ Dale D. Achabal Director May 26, 1999
- -------------------
Dale D. Achabal

/s/ Larry R. Bemis Director May 26, 1999
- ------------------
Larry R. Bemis

/s/ Richard F. Clayton Director May 26, 1999
- ----------------------
Richard F. Clayton

/s/ Marshall S. Geller Director May 26, 1999
- ------------------------
Marshall S. Geller

/s/ Marco F. Weiss Director May 26, 1999
- ------------------
Marco F. Weiss

/s/ Charles R. Chinni Chairman of the Board, President May 26, 1999
- --------------------- and Chief Executive Officer
Charles R. Chinni (Principal Executive Officer)

/s/ Douglas C. Felderman Director, Senior Vice President- May 26, 1999
- ------------------------ Finance, Chief Financial Officer
Douglas C. Felderman and Secretary
(Principal Financial Officer)

/s/ Gary A. Van Wagner Corporate Controller May 26, 1999
- ---------------------- (Principal Accounting Officer)
Gary A. Van Wagner

Page 56
<PAGE>
EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------
3.1 Form of Restated Certificate of Incorporation of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
3.2 Restated By-laws of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
4 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company's Form
8-K, as filed with the Commission on December 1, 1995.
** 10.1 Stock Option Plan for Executive and Key Employees of the
Company, including the form of the individual option
agreement thereunder.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
** 10.2 Form of Amendment to Stock Option Plan for Executive and Key
Employees of the Company, including the form of the amendment
to the individual option agreement thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.3 Amended and Restated 1994 Equity Participation Plan of the
Company, including the forms of the individual option
agreements thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.4 Amendment to the Amended and Restated 1994 Equity
Participation Plan (First) dated July 6, 1995.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.5 Amendment to the Amended and Restated 1994 Equity
Participation Plan (Second) dated May 14, 1997.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.6 Third Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 20, 1998.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
** 10.7 Form of the Company's Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.

<PAGE>
Exhibit No. Description
- ----------- -----------
** 10.8 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan dated January 5, 1995.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.
10.9 Warrant Agreement (Warrant 1), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.10 Warrant Agreement (Warrant 2), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.11 Registration Rights Agreement dated as of January 2, 1996 by
and between the Company and BT Capital.
Incorporated herein by reference to the Company's Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.12 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 31, 1996, as filed
with the Commission on October 11, 1996.
10.13 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
10.14 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated September 11,
1998.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 29, 1998, as filed
with the Commission on October 13, 1998.
10.15 Amended and Restated Employment Agreement between Charles
Chinni and Strouds, Inc., dated May 20, 1998.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 29, 1998, as filed
with the Commission on October 13, 1998.
* 23 Consent of Independent Auditors
* 27 Financial Data Schedule
- ------------------------------

* Filed herewith
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the form pursuant to item 14(a)3 of Form 10-K.

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

To Board of Directors
Strouds, Inc.:

We consent to incorporation by reference in the Registration Statements on
Form S-8 (No. 33-87608 and No. 33-87610) of our report dated April 14, 1999,
relating to the balance sheets of Strouds, Inc. as of February 27, 1999 and
February 28, 1998 and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
February 27, 1999, which report appears in the February 27, 1999 Annual Report
on Form 10-K of Strouds, Inc.

/s/KPMG LLP
- --------------------------
Los Angeles, California
May 20, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS FOUND ON PAGES 30 AND 31 OF THE
COMPANY'S FORM 10-K FOR THE YEAR, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-27-1999
<CASH> 269
<SECURITIES> 0
<RECEIVABLES> 1,763
<ALLOWANCES> 0
<INVENTORY> 60,832
<CURRENT-ASSETS> 66,857
<PP&E> 52,955
<DEPRECIATION> 31,601
<TOTAL-ASSETS> 96,443
<CURRENT-LIABILITIES> 36,245
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 30,117
<TOTAL-LIABILITY-AND-EQUITY> 96,443
<SALES> 227,571
<TOTAL-REVENUES> 227,571
<CGS> 163,628
<TOTAL-COSTS> 163,628
<OTHER-EXPENSES> 60,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,030
<INCOME-PRETAX> 214
<INCOME-TAX> 0
<INCOME-CONTINUING> 214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02

</TABLE>