THE
                                    SHARPER
                                     IMAGE





                               1999 Annual Report

<PAGE>

                               Corporate Profile

         Sharper Image  Corporation is a  multi-channel  specialty  retailer and
product developer that is nationally and  internationally  renowned as a leading
source of new, innovative,  high-quality products that make life eaiser and more
enjoyable.

         The Sharper Image enjoys an exceptionally strong brand identity, with a
name that is  synonymous  with fun and  entertainment,  design  and  creativity,
uniqueness and technological innovation.

         A key strength is the Company's ability to create exclusive proprietary
merchandise.  These  products,  labeled  Sharper  Image  Design(TM),  are highly
marketable and form the foundation of the Company's  success in diverse channels
of distribution.

         The Company  currently  operates 90 stores  nationwide,  and  generates
direct  sales  through its  monthly  Sharper  Image print  catalog and online at
sharperimage.com, the Company's Internet e-commerce Web site.

         The Company also generates  business-to-business  revenues  through its
corporate incentive and rewards programs and wholesale operations.


     NET EARNINGS             TOTAL REVENUES                INTERNET REVENUES
    ($ THOUSANDS)              ($ MILLIONS)                    ($ MILLIONS)

1997    1998   1999          1997    1998    1999         1997   1998     1999
----    ----   ----          ----    ----    ----         ----   ----     ----
       FISCAL                       FISCAL                      FISCAL

593    4,602   9,325        216.8    243.1   294.4        1.6     4.9     28.5

<PAGE>

                             Record Accomplishments

Record net  earnings  of $9.3  million,  a 103 percent  increase  over the prior
fiscal year, and

Record total revenues of $294.4 million, a 21 percent increase

Record gross margin rate of 51.0 percent, a 2.0 percentage point increase

Record Internet sales of $28.5 million, a 479 percent increase

Record  store  sales of $188.4  million,  a 16 percent  increase,  including  12
percent increase in comparable store sales.


Financial Highlights
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                   Fiscal Year Ended January 31,
                                          --------------------------------------------------------------------------
                                               2000            1999           1998           1997           1996
                                          (Fiscal 1999)   (Fiscal 1998)  (Fiscal 1997)  (Fiscal 1996)  (Fiscal 1995)
                                          --------------------------------------------------------------------------
<S>                                       <C>             <C>            <C>            <C>             <C>
Operating Results
Revenues                                  $   294,365     $   243,114    $   216,815    $   210,245     $   204,184
Provision for loss on the closure
  the SPA Collection division                      --              --             --         (8,000)(1)          --
Earnings (loss) before income taxes            15,541           7,670            988         (7,241)            739
Net earnings (loss)                             9,325           4,602            593         (4,345)            444
Net earnings (loss) per share - Basic            0.89(2)         0.54           0.07          (0.53)           0.05
                                Diluted   $      0.82(2)  $      0.51    $      0.07    $     (0.53)    $      0.05
Balance Sheet Data
Working capital                           $    54,644     $    16,003    $    11,633    $     9,429     $    17,233
Total assets                                  142,119          82,045         78,662         78,804          70,456
Long term notes payable                         2,366           2,513          3,299          4,245           3,355
Stockholders' equity                      $    77,123     $    36,649    $    29,156    $    28,449     $    32,758
Current ratio                                    1.93            1.40           1.27           1.22            1.56
Statistics
Number of stores at year end                       89              87             85             82(3)           78(3)
Comparable store sales increase (decrease)       12.3%            5.3%           1.1%          (2.1%)           3.3%
Annualized net sales per square foot      $       546     $       484    $       465    $       458     $       473
Number of catalogs mailed(4)               47,581,000      41,338,000     38,261,000     34,795,000      32,780,000
Average revenue per transaction:
   Stores                                 $       106     $       102    $       104    $        97     $       106
   Catalog(4)                             $       145     $       141    $       160    $       169     $       122
   Internet                               $        97(5)  $       140    $       111    $        77     $        77
Return on average stockholders' equity           16.4%           14.0%           2.1%           N/A             1.4%
Book value per share                      $      7.33     $      4.30    $      3.51    $      3.44     $      3.97
Weighted average number of shares
 outstanding -
   Basic                                   10,516,358       8,532,588      8,303,425      8,260,208       8,249,259
   Diluted                                 11,358,004       9,072,832      8,537,032      8,260,208       8,682,078
</TABLE>

 Dollars are in thousands except net earnings (loss) per share and statistics.

(1)  The Company  incurred a one-time  charge  related to the closure of the SPA
     Collection division of $0.56 loss per share.

(2)  The earnings  per share for fiscal 1999 reflect the dilutive  effect of the
     additional  3.0  million  shares  generated  from the July  1999  secondary
     offering.

(3)  Excludes six and four SPA Collection stores at January 31, 1997 and 1996.

(4)  Based upon  Sharper  Image  catalog -  excludes  other  specialty  and test
     mailing catalogs.

(5)  Includes results from auction site started in February 1999.

<PAGE>

To Our Shareholders

     I'm delighted to report that 1999 was our best year ever.  Annual  revenues
reached a record  $294.4  million - climbing 21 percent over last year's  record
level. Our net earnings were the highest in our 23-year  history,  reaching $9.3
million, a 103 percent increase over the prior year's $4.6 million.  Every sales
channel posted consistently impressive gains and outperformed our expectations.

     Our comparable  store sales increased 12 percent on top of last year's five
percent gain; total retail store sales increased 16 percent,  to a record $188.4
million.  The Sharper Image catalog posted sales of $65.6 million,  a 12 percent
gain,  as  increased  circulation  help to drive  sales in  stores  and  online.
Internet sales surged 479 percent,  to $28.5 million.  Our  business-to-business
operations also enjoyed excellent sales gains to record levels.

     Most importantly, we achieved these outstanding financial results by having
a sound strategic vision that was  consistently  executed by an experienced team
of associates.

Sharper Image Design(TM)

     Sharper  Image is one of the most powerful  brand names in retail,  and our
sophisticated product development  capability gives us a distinct advantage over
other  retailers of hard goods.  This year,  Sharper Image  Design(TM)  products
accounted for an impressive 29 percent of sales - 11 percentage points over last
year's 18  percent.  The  popularity  of both  established  and new  proprietary
products  exceeded our  expectations.  The Ionic Breeze(TM) Silent Air Purifier,
with  exclusive  patented  electronics  that propel air silently,  was again the
year's top seller.  In 1999,  we extended the Ionic Breeze line to include a Car
Air Purifier,  a Plug-In Air Purifier for small spaces,  and a wearable Personal
Air Purifier - all top  performers.  We created the Q Ball(TM),  an  irreverent,
talking, high-tech version of a fortune-teller's crystal ball - our best-selling
novelty item ever. And we created the world's first and only shower CD stereo.

     Sharper Image Design(TM) products,  combined with private-label merchandise
from other  manufacturers,  accounted for 50 percent of sales in 1999 and helped
raise our  gross  margin  to 51.0  percent,  up 2.0  percentage  points.  As the
selection  continues to expand,  plans for 2000 target our own-label products to
account for up to 60% of sales.

Internet E-Commerce

     We launched our Web site nearly half a decade ago. It's  difficult to fully
characterize  the dimensions of shifts in consumers'  buying  patterns,  but one
story  will tell:  During the peak days of  December  1999,  we did more  online
business in 72 hours than we did in all of 1997!

     In 1999, innovations at our Web site included establishing an auction site;
adding  3D  interactivity  and  sound  to Web  product  presentations;  creating
successful email campaigns to our Internet buyers; and enhancing the ease of use
with express  shopping  settings in a secure  environment.  E-commerce  is a key
focus of our  strategy,  and we will  continue to devote  significant  human and
financial resources to achieving high sales growth on the Web. The Internet is a
quicker and more  economical  way to reach a vast  consumer base and it gives us
the best  opportunity  to realize  our vision and become a much  larger and more
profitable company.

Growth

     This  record  year was the  result of a unique  business  model and a great
strategy, well executed. Powerful brand. Proprietary products.  Direct-marketing
know-how. Multi-channel synergy. Effective, aggressive multimedia advertising to
attract  new  customers.   Innovative  use  of  online  technologies.   Superior
merchandising and marketing. Solid operational  infrastructure.  We demonstrated
our ability to achieve  excellent  results,  consistently.  This  strategy  will
continue to be our focus in the next  fiscal year and beyond.  I want to express
my heartfelt  gratitude to our entire team of associates.  They worked very hard
all year and have enjoyed,  with me, the satisfaction of achieving our goals. On
behalf of all of us, I thank you for your confidence and support.


Sincerely,

/s/ Richard

Richard Thalheimer
Chairman, Founder and
Chief Executive Officer

                                       4

<PAGE>

FULL PAGE PHOTO


     The  CD  Shower  Companion(TM)  was
     created by Sharper Image Design(TM)
     and is the  world's  first and only
     stereo  CD  player  made for use in
     the Shower


<PAGE>

FULL PAGE COLOR PHOTO

<PAGE>

PHOTOS

IONIC HAIR WAND-PRO   LIGHTSCAPE RELAXATION SYSTEM   PERSONAL COOLING SYSTEM 2.0

                            SHARPER IMAGE DESIGN(TM)

     Sharper  Image  Design"  products  are  conceived,   designed,  engineered,
packaged,  contract  manufactured  and marketed  solely by the  Company.  Led by
founder and CEO Richard  Thalheimer,  and Sharper  Image senior vice  president,
Charles Taylor,  our development  team creates a wide range of innovative,  high
quality  items - from  interactive  toy  robots to  silent  air  purifiers.  Our
"Invented Here" assortment is diverse,  fresh,  exciting,  attractive and highly
marketable to a broad base of  consumers.  Many  products  incorporate  patented
technologies  that are  unavailable  elsewhere.  Such items have no equal in the
marketplace,  cannot be price  shopped,  and vet they  represent  clear value to
customers because of their imaginative,  problem-solving  usefulness. The higher
margins  of our own  brand  allow  us to  broaden  our  customer  reach  through
increased  multimedia  advertising  in our catalog and  special  single  product
mailers;  in print media; on television,  radio,  infomercials and online;  with
email marketing programs; and in business-to-business  trade publications.  This
combination of brand,  product and  advertising  drove Sharper Image  Design(TM)
items to the top of our selling  charts,  accounting  for 29 percent of sales to
consumers.  With more  extraordinary  products to be  launched in 2000,  Sharper
Image Design" will continue to increase as a percentage of our growing sales.


PHOTOS

Powerflow Height-Enhancing Insoles

CD Radio/Alarm Clock with Sound Soother

Power Tower 100 Motorized CD Rack

PROPRIETARY PRODUCTS
(PERCENTAGE OF SALES)

        FISCAL
1997     1998     1999
8%       18%      29%

<PAGE>

Sharper Image for Everyone

     Nearly  a  quarter  century  of  visionary  merchandising  and  imaginative
marketing has made Sharper Image one of the most widely recognized and respected
brands - an enduring  American  icon that conveys  genuine  enthusiasm  for well
designed,  technologically  innovative  products  that make life easier and more
enjoyable.  We aim to build on our brand's  strengths  to reach a larger base of
consumers with proprietary Sharper Image Design(TM) products that are unique yet
broadly appealing, fun yet useful,  sophisticated yet affordable. Our aggressive
multimedia  advertising programs are designed to support the initiative to build
a larger customer base.

     The Internet has  fundamentally  altered the business  model for retailers.
Many companies are threatened. But established sellers with a clearly positioned
brand,  exclusive  products,   multi-channel   capability  and  direct-marketing
know-how are  capitalizing on this change in the competitive  arena. The Sharper
Image is among a select group of premier  specialty  retailers that,  because of
the Internet, is poised to seize this extraordinary opportunity for significant,
profitable growth.

Sharper Image Stores

     The mortar in our "click and mortar" formula  finished fiscal 1999,  during
the highest volume months, with five straight months of double-digit  comparable
stores sales growth. For the year, comparable store sales increased 12 percent -
a clear  signal that  shopping  in a store is still a vital and fun  experience.
Synergistic use of multimedia  advertising - increased catalog circulation,  new
radio and TV campaigns,  expanded  newspaper  coverage - helped our 89 stores to
set an enviable  record sales pace.  In 2000, a new POS system will be installed
in our stores to further enhance  customer service  capabilities.  We're pleased
with the updated look of our new format for stores. This year we plan to remodel
up to eight stores and to open four to six new stores.


PHOTOS

Sharper Image stores in Palm Beach Gardens,
FLA, showcases our new design format.


                                       8
<PAGE>

FULL PAGE PHOTO

Colorful, distinctive packaging is key
to the visual merchandising and marketing of our
Sharper Image Design(TM) brand in our stores.


                                       9
<PAGE>

FULL PAGE PHOTO



<PAGE>

                   Internet                           Internet
                   Revenues                        Percentage of
                  ($ Millions)                        Revenues

                     FISCAL                            FISCAL
            1997      1998      1999          1997      1998      1999
            ----      ----      ----          ----      ----      ----
             1.6       4.9      28.5          0.7%      2.0%      9.7%

Internet

     Our  e-commerce  site,  sharperimage.com,  is widely  recognized as a great
place to visit, shop and buy. We're continuously  improving our site's usability
and entertainment  value. In 1999, we added 3D interactivity and sound to dozens
of  product  presentations  using  state-of-the-art  3D  technology;  rich media
technology  to show  off  the fun of the Q  Ball's(TM)  sound  effects;  express
shopping  enhancements  to free customers from redundant  keying of information;
multiple   ship-to   addresses;   virtual   electronic  gift   certificates  for
"Last-Second  Shopping!"(TM);  online  gift  registry;  email  promotions;  gift
guides; and a $2 incentive for catalog recipients to place orders online.  Sales
surged nearly six-fold in 1999. Early in 2000,  Forbes.com  honored us as one of
only 33 Forbes  Favorite  Web sites - picking  us as the best  online  store for
"perfect  gifts."  We also  launched  our own  auction  site for  Sharper  Image
merchandise  and it was immensely  popular  right from the start.  Our goals for
fiscal 2000 are to maintain a very high rate of growth,  fueled by Sharper Image
Design(TM) products,  increased advertising and dramatic site enhancements.  Our
sales  goal  for  fiscal  2000 is to at  least  double  1999's  record  Internet
revenues.

<PAGE>

Catalog & Direct Marketing

     The Internet has revitalized the world of direct marketing - an arena where
Sharper  Image  is  one of the  most  recognized  and  prestigious  brands.  The
industry's  trade  magazine,  Catalog Age,  last year named us as one of "The 10
Best  Catalog  Concepts  Ever" - noting that The Sharper  Image was  "seminal in
creating  and  influencing  the  catalog  business"  by being the  first  direct
marketer "to make it cool for well-to-do, educated guys to buy by mail."

     The Company has  obviously  grown and changed in 23 years;  research  shows
that two-thirds of our catalog buyers this holiday were women.  What's more, our
unique product  assortment is now driven by best-sellers  that clean air, remove
carpet stains,  address  personal  grooming  needs and, in general,  provide the
kinds of  innovative  solutions  that  consumers  have always sought from direct
merchants.

     In 1999, we tested a  single-product  "solo mailer" and enjoyed  tremendous
success with several campaigns. These targeted solo mailers introduced our Ionic
Breeze(TM)  Silent  Air  Purifier  - and The  Sharper  Image - to an entire  new
universe of consumers.  This  exceptionally  profitable new program is expanding
this year, with additional products and greatly increased circulation.

     To millions of loyal customers, our colorful monthly catalog is The Sharper
Image - the medium that built the brand.  It remains our  principle  advertising
vehicle and, in 1999, we increased  circulation  15 percent to its highest level
ever - 47.6 million catalogs.  This year,  boosted by the surging  popularity of
our Sharper Image Design(TM) exclusive products and of online ordering,  we plan
to  continue  to  increase  catalog   circulation  and  other  direct  marketing
activities  to attract  new  customers.  The  Company  intends to  continue  the
strategy of growing its customer base through aggressive multimedia  advertising
programs with the objective of achieving an appropriate return on investment.

<PAGE>

Business-to-Business

     Sharper Image  Corporate  Incentives & Rewards have soared in popularity as
sales-driven  companies  compete  to  keep  their  increasingly  valuable  human
resources.  The  Sharper  Image  brand is widely  recognized  as one of the most
effective  motivators  in this  thriving  marketplace - few can match the prized
"trophy  value" of a product  award from The Sharper  Image.  What's  more,  our
programs are regarded as among the most  innovative in the  business.  Recently,
the editors and online readers of Incentive magazine honored sharperimage.com as
one of the incentive  industry's  best Web sites.  New online  programs  include
custom Web sites with major corporate customers, targeted emails as motivational
tools, and e-Awards(TM) for tiered, points-based online Sharper Image catalogs.

     As  part of our  strategy  to  leverage  our  strong  brand  and  exclusive
products, this area of business-to-business sales is targeted for continued high
growth in 2000.

     Sharper Image Wholesale enhances our market presence and helps to establish
The Sharper  Image as a premier  source of  innovative  merchandise  to a larger
universe of consumers.  Taking advantage of our Company's vertical  integration,
the  wholesale  sales force targets  select  department  and  specialty  stores,
catalogs and Web sites with  appropriate  selections of Sharper Image Design(TM)
products.  In 2000,  this  portion of our  business  is  planned to  selectively
increase its international presence.

PHOTOS

The Sharper Image  is a leader in the incentives and rewards industry.

                                       13

<PAGE>

Management's Discussion and Analysis of
Results of Operations and Financial Condition
--------------------------------------------------------------------------------
Sharper Image Corporation

Results of Operations
Percentage of Total Revenues

                                              Fiscal Year Ended Jan. 31,
                                 -----------------------------------------------
                                     2000             1999             1998
                                 (Fiscal 1999)    (Fiscal 1998)    (Fiscal 1997)
                                 -----------------------------------------------
Revenues:
  Net store sales                    64.0%            66.8%             69.9%
  Net catalog sales                  22.3             29.1              27.1
  Net Internet sales                  9.7              2.0               0.7
  Net wholesale sales                 3.5              1.4               1.5
  List rental                         0.4              0.5               0.5
  Licensing                           0.1              0.2               0.3
                                    -----            -----             -----
Total Revenues                      100.0%           100.0%            100.0%

Costs and Expenses:
  Cost of products                   48.8             50.6              53.3
  Buying and occupancy                9.5             10.8              11.0
  Advertising and promotion          12.9             11.2              10.5
  General, selling, and
    administrative                   23.7             24.3              24.5
                                    -----            -----             -----
Operating Income                      5.1              3.1               0.7
Other Income (Expense)                0.2              0.1              (0.2)
                                    -----            -----             -----
Earnings Before Income Tax            5.3              3.2               0.5
Income Tax                            2.1              1.3               0.2
                                    -----            -----             -----
Net Earnings                          3.2%             1.9%              0.3%
                                    =====            =====             =====

Revenues
                                              Fiscal Year Ended Jan. 31,
                                 -----------------------------------------------
                                     2000             1999             1998
Dollars in thousands             (Fiscal 1999)    (Fiscal 1998)    (Fiscal 1997)
                                 -----------------------------------------------
Net store sales                    $188,416        $162,371          $151,589
Net catalog sales                    65,617          70,750*           58,772*
Net Internet sales                   28,495           4,922             1,633
Net wholesale sales                  10,483           3,464             3,199
                                   --------        --------          --------
Total Net Sales                     293,011         241,507           215,193
List rental                           1,129           1,088               982
Licensing                               225             519               640
                                   --------        --------          --------
Total Revenues                     $294,365        $243,114          $216,815
                                   ========        ========          ========

*  Includes  net sales  from the Home  Collection  Catalog  of  $12,016,000  and
$9,647,000 for fiscal 1998 and 1997, respectively. The test mailings of the Home
Collection  Catalog were  terminated in late fiscal 1998 and  accordingly  those
sales are not recurring in net catalog sales for fiscal 1999.

     Net sales for fiscal 1999 increased  $51,504,000,  or 21.3%, from the prior
fiscal year.  Returns and  allowances  were 11.0% of sales for fiscal  1999,  as
compared  with 11.4% for fiscal  1998.  The  increase in fiscal 1999 Company net
sales  compared to fiscal 1998 was  attributable  to increases in net sales from
Sharper  Image  stores of  $26,045,000;  increases in net sales from the Sharper
Image catalog  (excluding Home  Collection) of $6,883,000;  and increases in net
sales from Internet operations of $23,573,000. The total Company increase in net
sales was  partially  offset by the  decrease in net sales  attributable  to the
discontinuance of the test mailings of the Sharper Image Home Collection catalog
in fiscal 1998.  Excluding  the net sales of the Sharper  Image Home  Collection
catalog for fiscal 1998 for  comparative  purposes,  Company net sales increased
$63,520,000, or 27.7%, respectively.

     There were three key factors that  contributed to the revenue  growth.  The
first was the continued popularity of Sharper Image Design proprietary products,
as well as private label products.  The continuing  development and introduction
of these new and popular products is an important factor in the Company's future
success.  Sharper Image Design  proprietary  products  increased from 18% of net
sales to consumers in fiscal 1998 to 29% in fiscal 1999.  Private label products
increased  from 11% of net sales to  consumers  in fiscal  1998 to 21% in fiscal
1999.   Secondly,   management  believes  the  effectiveness  of  its  increased
multimedia  advertising  initiatives  in  fiscal  1999  was  also a  significant
contributing  factor in  achieving  record  revenue  levels and  attracting  new
customers and will be an important  factor in future  revenue  growth,  although
there  can be no  assurances  of the  continued  success  of  these  and  future
advertising  initiatives.  Rounding out the factors, the surge in the popularity
of  online  shopping,  and  the  Company's  determined  push  to  have a  robust
e-commerce site, also contributed to the higher level of revenue growth.

     For fiscal  1999,  net store sales  increased  $26,045,000,  or 16.0%,  and
comparable  store sales increased by 12.3%.  The increase in net store sales for
fiscal 1999 reflects a 12.8% increase in total store  transactions,  with a 3.0%
increase  in average  revenue per  transaction.  Partially  contributing  to the
increased  transactions  is that  several  key stores  were  remodeled  in 1998.
Although during the remodeling only a portion of the remodeled  stores were open
for business, the appealing new store format increased store traffic in subse-

                                       14

<PAGE>

Management's Discussion and Analysis of (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Revenues (continued)

quent months by reaching an expanded  customer base with broad appeal  products,
and enhanced  visibility  through  additional  advertising.  The increase in net
store sales in fiscal 1999 is also  attributable  to the fiscal 1999  opening of
five new stores and  annualized  sales of four new stores  opened in fiscal 1998
partially  offset by three stores that closed at their lease  maturity in fiscal
1999.  Net sales per average  square  foot  increased  to $546 for fiscal  1999,
compared to $484 in fiscal 1998 and $465 in fiscal  1997.  The  Company's  store
productivity  continues  to  improve  as sales per  square  foot  increases  and
compares favorably to the industry.

     Net catalog  sales for fiscal year 1999  decreased  $5,133,000 or 7.3% from
fiscal 1998,  which  includes the decrease in the Sharper Image Home  Collection
Catalog sales, due to the  discontinuation  of the test mailings of that catalog
in late  fiscal  1998.  Excluding  the sales of the Home  Collection  Catalog in
fiscal 1998, net catalog sales  increased  $6,883,000,  or 11.7% in fiscal 1999.
Excluding  Home  Collection  Catalog  operations,  the fiscal  1999  increase in
Sharper Image Catalog net sales reflects an increase of 9.0% in transactions and
a 2.5% increase in average revenue per transaction,  compared to the prior year.
Management  believes the increase in Sharper  Image  catalog  sales is partially
attributable  to a 13.5%  increase in Sharper Image Catalog pages  circulated in
fiscal 1999 as compared to fiscal 1998, as well as the  continued  popularity of
Sharper  Image Design  proprietary  and private  label  products.  Management is
continually  reviewing  the number of catalogs and the pages  circulated  in its
efforts to optimize  the  revenues  from  catalog  advertising  and is currently
planning an increase in pages circulated for fiscal 2000. The Company intends to
continue the strategy of growing its customer base through aggressive multimedia
advertising programs, as well as marketing to these newly acquired customers.

     The  Company's  fiscal 1999  Internet  sales from  sharperimage.com,  which
includes the Sharper Image auction site, increased $23,573,000,  or 478.9%, from
fiscal 1998. The fiscal 1999 increase in Internet net sales reflects an increase
of 736.4% in transactions. The Company's e-commerce site, sharperimage.com,  was
enhanced with several new feature  improvements  from ease-of-use and technology
perspectives.  3D  interactivity  and sound technology was introduced along with
other rich media  technologies to present products in fun and entertaining ways.
New features  include  express  shopping  settings,  one time  registration in a
secure  environment,  gift guides,  virtual gift  certificates,  email marketing
promotions, multiple addresses stored securely for customer's gift lists, and $2
off ordering incentives for Internet purchases. The increase in transactions was
partially  offset  by a 30.8%  decrease  in  average  revenue  per  transaction,
compared to the prior year. The decrease in average  revenue per  transaction is
primarily  attributable  to the Internet  auction  activity,  which began in the
Company's  first quarter ended April 30, 1999.  The auction site was launched to
further  the  Company's   strategy  of  increasing  its  Internet  business  and
broadening its customer base, and has  significantly  increased total visits and
page views on the Company's Web site. The auction site not only offers consumers
the fun of bidding on and winning  products at less than retail prices,  it also
allows the Company the opportunity to effectively manage its closeout products.

     Net wholesale sales for fiscal year 1999 increased  $7,019,000,  or 202.6%,
compared to fiscal 1998,  primarily due to new customers  acquired  prior to the
1999  holiday  season.  Certain of these  customers  were part of a test concept
program and may not generate repeat sales in fiscal 2000.

     Net sales of $241,507,000 for fiscal 1998 increased $26,314,000,  or 12.2%,
from the prior fiscal year. Returns and allowances as a percentage of sales were
11.4% for fiscal  1998,  compared  to 12.2% for  fiscal  1997.  Net store  sales
increased  $10,782,000,  or 7.1%,  comparable  store sales  increased  5.3%, net
catalog sales  increased  $11,978,000,  or 20.4%,  net Internet sales  increased
$3,289,000,  or 201.5%, and net wholesale sales increased $265,000,  or 8.3%, as
compared to fiscal 1997.

     The increase in net store sales for fiscal 1998 was primarily  attributable
to an 8.7%  increase in total  store  transactions,  partially  offset by a 1.3%
decrease in average revenue per transaction.  Also  contributing to the increase
was the fiscal  1998  opening of four new  stores  and  annualized  sales of six
stores opened in fiscal 1997, partially offset by the 1998 closing of two stores
at the maturity of the store leases.

     Net catalog sales for fiscal 1998 were  positively  impacted by an increase
of 34.7% in total catalog orders partially offset by a 10.6% decrease in average
revenue per order. The increase in catalog orders was partially  attributable to
advertising  campaigns in major consumer  magazines and newspapers.  The Company
believes that the 8.0% increase in the number of catalogs circulated for

                                       15

<PAGE>

Management's Discussion and Analysis of (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Revenues (continued)

Sharper Image catalog  during fiscal 1998 also  contributed  to increases in net
store sales and comparable store sales.

     The Company's  Internet sales increased to $4.9 million in fiscal 1998 from
$1.6  million in fiscal  1997.  Fiscal  1998  experienced  a 139.1%  increase in
Internet  orders and a 26.1% increase in average  revenue per  transaction  from
fiscal 1997. The threefold increase in sales reflects the increase in the number
of online shoppers and the Company's commitment to grow its e-commerce.

     Net wholesale sales increased $264,000, or 8.3%, primarily due to increased
sales of the Company's Sharper Image Design proprietary products.

     For the purpose of determining  comparable store sales,  comparable  stores
are defined as those which were open during the entire  comparable  month of the
previous  year  and  are  compared   monthly  for  purposes  of  this  analysis.
Inflationary effects are not considered significant to the growth of sales.

Cost of Products

     Cost of products  for fiscal 1999  increased  $20,551,000,  or 16.7%,  from
fiscal 1998.  The increase in cost of products is due to the higher sales volume
compared to the prior year, partially offset by the reduced sales of The Sharper
Image Home Catalog  Collection,  which carried  products with higher costs.  The
gross  margin rate for fiscal 1999 was 51.0%,  which was 2.0  percentage  points
better than the  comparable  prior year  period.  The higher  gross  margin rate
reflects an increase in sales of Sharper  Image Design  proprietary  and private
label products,  which generally carry higher margins than branded products. The
Sharper Image Design proprietary products percentage of net sales,  exclusive of
wholesale,  increased  to 29% from 18%, in fiscal 1999  compared to fiscal 1998.
The private label products increased to 21% from 11% in fiscal 1999, compared to
the prior year.

     Cost of products increased $7,596,000,  or 6.6%, in fiscal 1998 from fiscal
1997. The increase was primarily related to increases in net sales. The increase
in cost of sales was lower than the increase in sales, reflecting the beneficial
impact of the higher gross margin rate produced  during  fiscal 1998.  The gross
margin rate for fiscal 1998 was 49.0%,  compared to 46.3% for fiscal  1997.  The
higher gross margin rate  reflected an increase in sales of Sharper Image Design
proprietary  products to 18% of total sales to  consumers  from 8% for the prior
fiscal year.

     The  Company's  gross  margin  rate  fluctuates  with  the  changes  in its
merchandise mix, which is affected by new items available in various categories.
The  variation in  merchandise  mix from  category to category from year to year
reflects the characteristic  that the Company is driven by individual  products,
as  opposed  to  general  lines  of  merchandise.  Additionally,  the  Company's
expanding  auction site and other  promotional  activities  will tend to in part
offset the rate of increase in our gross margin performance. It is impossible to
predict future gross margin rates, although the Company's goal is to continue to
increase sales of Sharper Image Design proprietary  products and other exclusive
private label  products,  as these products  generally carry higher margins than
branded products.  The popularity of these proprietary  products  contributed to
the 2.0 percentage  point increase in the gross margin rate for fiscal 1999, and
should continue to have a positive impact on the Company's gross margin rate.

Buying and Occupancy

     Buying and occupancy costs for fiscal 1999 increased  $1,689,000,  or 6.5%,
from fiscal 1998. The increase primarily reflects a full year of occupancy costs
for four new stores opened in fiscal 1998 and the costs associated with the five
new stores  opened in fiscal  1999,  partially  offset by the three  stores that
closed at their lease maturity during fiscal 1999. Buying and occupancy costs as
a percentage of net sales  decreased from 10.8% in fiscal 1998 to 9.5% in fiscal
1999.

     Buying and occupancy expenses increased $2,249,000, or 9.4%, in fiscal 1998
from fiscal 1997. The increase  primarily reflects a full year of occupancy cost
of six new  stores  opened  during  fiscal  1997 and the cost of four new stores
opened in fiscal  1998,  partially  offset by the 1998  closure of two stores at
their lease  maturity.  Buying and occupancy  costs as a percentage of net sales
decreased from 11.1% in fiscal 1997 to 10.8% in fiscal 1998.

Advertising and Promotion

     Advertising and promotion  expenses for fiscal 1999 increased  $10,596,000,
or 38.7%,  from fiscal 1998. The increase in advertising and promotion  expenses
was partially  attributable  to a 13.5%  increase in Sharper Image catalog pages
circulated in fiscal 1999 and a seven percent increase in paper costs instituted
in the fourth quarter of

                                       16

<PAGE>

Management's Discussion and Analysis of (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Advertising and Promotion (continued)

fiscal 1999.  Although the Company does not  anticipate  significant  paper cost
increases in fiscal 2000, if significant increases  materialized,  the Company's
circulation plans and/or  advertising and promotion costs could be significantly
impacted.  The  increased  cost related to  circulation  increases was partially
offset by the  reduction  in costs  attributable  to the  discontinuance  of The
Sharper Image Home Collection  Catalog in fiscal 1998. In addition,  the Company
deployed several advertising initiatives to broaden its customer base, including
radio  advertising,  television  commercials,  infomercials,  direct response or
single product mailers,  among others. These increased  advertising  initiatives
were launched to realize the Company's  goal of acquiring new  customers,  which
the Company believes will produce  additional  sales in the stores,  catalog and
Internet channels, and business to business sales in future periods. Advertising
and  promotion  expenses as a percentage  of net sales  increased  from 11.3% in
fiscal 1998 to 13.0% in fiscal 1999.

     Advertising and promotion expenses for fiscal 1998 increased $4,601,000, or
20.2%,  from fiscal 1997.  The increase was primarily due to an 8.0% increase in
the number of Sharper Image catalogs  mailed and an 11.6% increase in the number
of pages  circulated,  as  compared  with  fiscal  1997.  Other  costs,  such as
advertising campaigns in major consumer magazines and newspapers;  infomercials;
and development of Internet marketing also contributed to the increased expenses
in fiscal  1998.  The  increase was  partially  offset by the 51.3%  decrease in
mailings of the test concept Sharper Image Home Collection catalog.  Advertising
and  promotion  expenses as a percentage  of net sales  increased  from 10.6% in
fiscal 1997 to 11.3% in fiscal 1998.

     While the Sharper Image catalog serves as the primary source of advertising
for its retail stores, mail order and Internet business, the Company continually
reevaluates its advertising strategies and catalog circulation plans to maximize
the effectiveness of its advertising programs.

General, Selling, and Administrative

     General,  selling and  administrative  expenses  for fiscal 1999  increased
$10,847,000,  or 18.4%,  from fiscal 1998.  The increase  was  primarily  due to
increases  in  variable  expenses  from  increased  net sales,  expenses  in the
Internet and  proprietary  product  areas for improved and expanded  operational
infrastructure,  increased  costs  associated  with attracting and retaining key
employees,  and  overall  selling  expenses  related to the  opening of five new
stores.  The Company competes for employees in certain highly competitive market
segments.  As a result,  the  Company's  efforts to attract  and retain  certain
employees are becoming more difficult and therefore more expensive.  The Company
is continually  evaluating its salary,  benefits,  and stock option  programs to
remain  competitive  in the  marketplace.  General,  selling and  administrative
expenses as a  percentage  of net sales  decreased  from 24.4% in fiscal 1998 to
23.8% in fiscal 1999.

     General,  selling,  and  administrative  expenses for fiscal 1998 increased
$5,932,000,  or 11.2%,  from fiscal 1997,  primarily due to increases in overall
selling  expenses  related to the  increase in net sales and related  additional
administrative   support  costs.  The  increase  was  partially  offset  by  the
improvement  in net delivery  income related to mail order  shipments.  General,
selling and administrative  expenses as a percentage of net sales decreased from
24.7% in fiscal 1997 to 24.4% in fiscal 1998.

Other Income (Expense)

     Other  income,  net, for fiscal 1999  increased  $303,000 from fiscal 1998,
primarily  due to the  interest  income  earned  during  fiscal 1999 from higher
investment  balances  generated from improved operating results and the proceeds
of the secondary offering completed in July 1999.

     Other  income,  net, for fiscal 1998  increased  $761,000 from fiscal 1997,
reflecting primarily the gain on the sale of certain equipment.

Income Taxes

     The effective tax rate for fiscal 1999,  1998,  and 1997 was 40.0%.  Income
taxes are accounted for using an asset and liability  approach that requires the
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences of events that have been  recognized in the Company's  consolidated
financial statements or tax returns. In estimating future tax consequences,  all
expected  future  events then known to  management  are  considered,  other than
changes in the tax law or rates.

Liquidity and Capital Resources

     The Company met its short-term liquidity needs and its capital requirements
in fiscal 1999 with cash generated from operations,  trade credit,  and proceeds
from the secondary offering. During fiscal 1999, the Company's cash increased by
$47,068,000 to $55,457,000 primarily due to proceeds

                                       17
<PAGE>

Management's Discussion and Analysis of (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Liquidity and Capital Resources (continued)


from the secondary  offering and the highest annual revenues and earnings in the
Company's history.

     On July 22, 1999,  the Company  completed an offering of 3.0 million shares
of its common  stock,  all of which  shares  were  offered by the  Company.  The
proceeds from the offering,  net of underwriters discount and offering expenses,
totaled  $30.2  million.  The  Company  intends  to use the  proceeds  from this
offering for general corporate purposes,  including investments in the Company's
Internet business,  expansion of its distribution and fulfillment capacity,  and
working capital.  At January 31, 2000, the Company had no amounts outstanding on
its revolving  loan credit  facility.  The highest  amount of direct  borrowings
under the revolving  loan credit  facility  during  fiscal 1999 was  $3,873,000,
compared  to  $14,288,000  during  fiscal  1998.  Letter of  credit  commitments
outstanding  under  the  credit  facility  at  January  31,  2000 and 1999  were
$3,192,000 and $4,108,000, respectively.

     The Company has a revolving secured credit facility which expires September
2003.  The credit  facility  has been  amended on several  occasions  and, as of
January 31, 2000, the agreement allows Company  borrowings and letters of credit
up to a maximum of $31  million  for the  period  from  October 1, 2000  through
December  31,  2000,  and up to $20  million at other times of the year based on
inventory  levels.  The credit  facility is secured by the Company's  inventory,
accounts  receivable,  general intangibles and certain other assets.  Borrowings
under this  facility  bear  interest at either  prime plus 0.25% per annum or at
LIBOR plus  2.25% per annum  determined  by  financial  performance.  The credit
facility  contains certain financial  covenants  pertaining to interest coverage
ratio  and net  worth  and  contains  limitations  on  operating  leases,  other
borrowings,  dividend  payments  and stock  repurchases.  For the  period  ended
January 31, 2000, the Company was in compliance with all covenants.

     Subsequent  to January 31, 2000,  an  amendment to the credit  facility was
completed  to set lower  interest  rates and to extend  the  expiration  date to
September 2004.  Borrowings  under the credit facility will now bear interest at
either the prime rate per annum or at LIBOR  plus 1.5% per annum  determined  by
financial  performance.  The credit facility allows seasonal borrowings of up to
$31 million for the period October 1 through December 31, 2000, increasing by $1
million for this period in each of the two  subsequent  years,  and remaining at
$33 million for this period the following year.

     In  addition,  the credit  facility  provides  for term  loans for  capital
expenditures  (Term Loans) up to an aggregate of $2.5 million.  Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
per annum or at LIBOR plus 2.50% per annum determined by financial  performance.
Each Term Loan is to be repaid in 36 equal monthly  principal  installments.  At
January 31, 2000, there were no amounts outstanding on the Term Loan facility.

     At January 31, 2000,  notes  payable  included a $2,513,000  mortgage  loan
collateralized by the Company's distribution center. This note bears interest at
a fixed rate of 8.40%,  provides for monthly  payments of principal and interest
in the amount of $29,367, and matures in January 2011.

     The Company's  merchandise inventory at January 31, 2000, was approximately
21.6% higher than the prior fiscal year. The increase in inventory reflected the
Company's  plan to bring  inventory to the optimal level to support sales growth
trends currently being experienced by the Company.

     The Company  leases all of its  offices,  stores,  and  seasonal  warehouse
space.  During the fiscal year ended January 31, 2000,  the Company  opened five
stores located in Palm Desert,  California;  Tampa,  Florida;  Buford,  Georgia;
Providence, Rhode Island; and Mission Viejo, California. During fiscal 1999, the
Company closed three stores located in Palm Springs,  California; San Francisco,
California; and Philadelphia, Pennsylvania at the maturity of the leases.

     In fiscal 2000,  the Company plans include  expanding its  fulfillment  and
distribution  center  capacity;  updating the Company's  e-commerce Web site for
sharperimage.com;  opening four to six new stores and  remodeling  approximately
eight stores at lease  maturity.  These  initiatives,  combined with a recurring
level of capital  expenditures,  will  result in  significantly  higher  capital
expenditures in fiscal 2000 over fiscal 1999.

     The Company is  currently  planning  to open four to six new Sharper  Image
stores during  fiscal 2000.  Total  capital  expenditures  estimated for new and
existing stores,  corporate  headquarters and the distribution center for fiscal
2000 are between $15 million and $25  million.  The Company  believes it will be
able to fund its cash needs for fiscal  2000  through  existing  cash  balances,
internally generated cash, trade credit, and the credit facility.

                                       18

<PAGE>

Management's Discussion and Analysis of (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Quantitative and Qualitative Disclosure
About Market Risk

     The Company is exposed to market risks,  which include  changes in interest
rates and, to a lesser  extent,  foreign  exchange  rates.  The Company does not
engage in financial transactions for trading or speculative purposes.

     The interest  payable on the Company's credit facility is based on variable
interest rates and therefore  affected by changes in market  interest  rates. If
interest  rates on  existing  variable  rate debt rose 0.8% (10% from the bank's
reference  rate) as of January 31, 2000, the Company's  results from  operations
and cash flows would not be materially  affected.  In addition,  the Company has
fixed  and  variable  income  investments  consisting  of cash  equivalents  and
short-term  investments,  which are also affected by changes in market  interest
rates.  The  Company  does  not  use  derivative  financial  instruments  in its
investment portfolio.

     The  Company  enters  into a  significant  amount of  purchase  obligations
outside of the U.S. which are settled in U.S. dollars and,  therefore,  has only
minimal exposure to foreign currency  exchange risks. The Company does not hedge
against foreign currency risks and believes that foreign currency  exchange risk
is immaterial.

Seasonality

     The Company's  business is highly seasonal,  reflecting the general pattern
associated  with the  retail  industry  of peak  sales and  earnings  during the
holiday  season.  The secondary peak period for the Company is June,  reflecting
gift buying for  Father's  Day and  graduations.  A  substantial  portion of the
Company's  total revenues and all or most of the Company's net earnings occur in
the fourth quarter ending January 31. The Company  generally  experiences  lower
revenues and earnings during the other quarters and, as is typical in the retail
industry,  has incurred and may continue to incur losses in these quarters.  The
results of operations for these interim periods are not  necessarily  indicative
of the results for the full fiscal year. Uncertainties and Risk

     The foregoing  discussion and analysis  should be read in conjunction  with
the Company's financial  statements and notes thereto included with this report.
The foregoing  discussion contains certain  forward-looking  statements that are
subject to certain risks and  uncertainties  that could cause actual  results to
differ materially from those set forth in such forward-looking  statements. Such
risks and uncertainties  include,  without limitation,  risks of changing market
conditions in the overall economy and the retail industry,  consumer demand, the
opening of new stores,  actual  advertising  expenditures  by the  Company,  the
success of the Company's advertising and merchandising strategy, availability of
products,  and other factors  detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking  statements.  The
Company undertakes no obligations to revise these forward-looking  statements to
reflect events or circumstances after the date hereof.

                                       19

<PAGE>

Statements of Operations
--------------------------------------------------------------------------------
Sharper Image Corporation

<TABLE>
<CAPTION>
                                                              Fiscal Year Ended January 31,
                                                 ------------------------------------------------------
                                                     2000                 1999                1998
Dollars in thousands except per share amounts    (Fiscal 1999)        (Fiscal 1998)        (Fiscal 1997
-------------------------------------------------------------------------------------------------------
<S>                                              <C>                  <C>                  <C>
Revenues:
  Sales                                          $    329,384         $    272,721         $    245,095
  Less: returns and allowances                         36,373               31,214               29,902
                                                 ------------         ------------         ------------
  Net Sales                                           293,011              241,507              215,193
  List rental                                           1,129                1,088                  982
  Licensing                                               225                  519                  640
                                                 ------------         ------------         ------------
                                                      294,365              243,114              216,815
                                                 ------------         ------------         ------------
Costs and Expenses:
  Cost of products                                    143,682              123,131              115,535
  Buying and occupancy                                 27,842               26,153               23,904
  Advertising and promotion                            37,992               27,396               22,795
  General, selling, and administrative                 69,853               59,006               53,074
                                                 ------------         ------------         ------------
                                                      279,369              235,686              215,308
                                                 ------------         ------------         ------------
Other Income (Expense):
  Interest income (expense) - net                         603                 (645)                (564)
  Other - net                                             (58)                 887                   45
                                                 ------------         ------------         ------------
                                                          545                  242                 (519)
                                                 ------------         ------------         ------------
Earnings Before Income Tax                             15,541                7,670                  988
Income Tax                                              6,216                3,068                  395
                                                 ============         ============         ============
Net Earnings                                     $      9,325         $      4,602         $        593
                                                 ============         ============         ============
Net Earnings Per Share - Basic                   $       0.89         $       0.54         $       0.07
                                                 ============         ============         ============
Net Earnings Per Share - Diluted                 $       0.82         $       0.51         $       0.07
                                                 ============         ============         ============
Weighted Average Number of Shares-Basic            10,516,358            8,532,588            8,303,425
                                                 ============         ============         ============
Weighted Average Number of Shares-Diluted          11,358,004            9,072,832            8,537,032
                                                 ============         ============         ============
</TABLE>

                       See Notes to Financial Statements.

                                       20
<PAGE>

Balance Sheets
--------------------------------------------------------------------------------
Sharper Image Corporation

                                                             January 31,
                                                   -----------------------------
                                                       2000            1999
Dollars in thousands except per share amounts      (Fiscal 1999)   (Fiscal 1998)
--------------------------------------------------------------------------------
Assets

Current Assets:
  Cash and equivalents                               $ 55,457          $  8,389
  Accounts receivable, net of allowance for
    doubtful accounts of $834 and $804                  7,882             6,787
  Merchandise inventories                              39,652            32,598
  Deferred catalog costs                                3,079             2,454
  Prepaid expenses and other                            7,494             5,605
                                                     --------          --------
Total Current Assets                                  113,564            55,833
Property and Equipment, Net                            23,961            22,513
Deferred Taxes and Other Assets                         4,594             3,699
                                                     --------          --------
     Total Assets                                    $142,119          $ 82,045
                                                     ========          ========

Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                                   $ 20,307          $ 11,653
  Accrued expenses                                     22,667            16,960
  Deferred revenue                                      8,605             7,268
  Income taxes payable                                  7,194             3,314
  Current portion of notes payable                        147               635
                                                     --------          --------
Total Current Liabilities                              58,920            39,830
Notes Payable                                           2,366             2,513
Other Liabilities                                       3,710             3,053
Commitments and Contingencies                              --                --
                                                     --------          --------
Total Liabilities                                      64,996            45,396

Stockholders' Equity:
  Preferred stock, $0.01 par value:
    Authorized, 3,000,000 shares: Issued and
    outstanding, none                                      --                --
  Common stock, $0.01 par value:
    Authorized, 25,000,000 shares: Issued and
    outstanding, 12,016,827 and 8,916,995 shares          120                89
  Additional paid-in capital                           43,707            12,589
  Retained earnings                                    33,296            23,971
                                                     --------          --------
Total Stockholders' Equity                             77,123            36,649
                                                     --------          --------
     Total Liabilities and Stockholders' Equity      $142,119          $ 82,045
                                                     ========          ========

                       See Notes to Financial Statements.

                                       21
<PAGE>

Statements of Stockholders' Equity
--------------------------------------------------------------------------------
Sharper Image Corporation

<TABLE>
<CAPTION>
                                                             Additional
                                     Common        Stock      Paid-in      Retained
Dollars in thousands                 Shares        Amount     Capital      Earnings      Total
------------------------------------------------------------------------------------------------
<S>                                <C>            <C>        <C>           <C>         <C>
Balance at January 31,1997          8,266,940      $  83      $  9,590      $18,776     $ 28,449

Issuance of common stock
 for stock options exercised,
 (net of income tax benefit)          124,340          1           237                       238

Repurchase of common stock            (35,000)        (1)         (123)                     (124)

Net earnings                                                                    593          593
                                  -----------      -----      --------      -------     --------
Balance at January 31, 1998         8,356,280         83         9,704       19,369       29,156

Issuance of common stock
 for stock options and
 warrants exercised (net of
 income tax benefit)                  560,715          6         2,885                     2,891

Net earnings                                                                  4,602        4,602
                                  -----------      -----      --------      -------     --------
Balance at January 31, 1999         8,916,995         89        12,589       23,971       36,649

Issuance of common stock
 from secondary offering and
 for stock options exercised
 (net of income tax benefit)        3,099,832         31        31,118                    31,149

Net earnings                                                                  9,325        9,325
                                  -----------      -----      --------      -------     --------
Balance at January 31, 2000        12,016,827      $ 120      $ 43,707      $33,296     $ 77,123
                                  ===========      =====      ========      =======     ========
</TABLE>

                       See Notes to Financial Statements.

                                       22
<PAGE>

Statements of Cash Flows
--------------------------------------------------------------------------------
Sharper Image Corporation

<TABLE>
<CAPTION>
                                                                              Fiscal Year Ended January 31,
                                                                     ----------------------------------------------
                                                                         2000             1999            1998
Dollars in thousands                                                 (Fiscal 1999)    (Fiscal 1998)   (Fiscal 1997)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>              <C>
Cash was Provided by (Used for) Operating Activities:
Net earnings                                                           $  9,325         $  4,602         $    593
Adjustments to reconcile net earnings to net cash
 provided by (used for) operating activities:
  Depreciation and amortization                                           6,480            5,027            4,334
  Deferred rent expense                                                     170               78              151
  Deferred income taxes                                                  (1,348)          (1,459)           1,614
  Gain on sale of equipment                                                  --             (840)              --
Changes in operating assets and liabilities:
  Accounts receivable                                                    (1,095)           1,402           (2,274)
  Merchandise inventories                                                (7,054)           1,936           (7,169)
  Deferred catalog costs, prepaid expenses and other                     (2,061)           1,298           (1,571)
  Accounts payable and accrued expenses                                  14,361           (5,822)             838
  Deferred revenue, income taxes and other liabilities                    5,704            3,568            1,308
                                                                       --------         --------         --------
Cash Provided by (Used for) Operating Activities                         24,482            9,790           (2,176)
                                                                       ========         ========         ========
Cash was Provided by (Used for) Investing Activities:
  Property and equipment expenditures                                    (8,039)          (8,431)          (4,437)
  Proceeds from sale of equipment                                           111            1,736               53
                                                                       --------         --------         --------
Cash Used for Investing Activities                                       (7,928)          (6,695)          (4,384)
                                                                       ========         ========         ========
Cash was Provided by (Used for) Financing Activities:
  Proceeds from issuance of common stock, including warrants
   and stock options exercised (net of stock repurchases)                31,149            2,891              114
  Proceeds from notes payable and revolving credit facility              11,955           46,921           27,761
  Principal payments on notes payable and revolving credit facility     (12,590)         (48,019)         (28,687)
                                                                       --------         --------         --------
Cash Provided by (Used for) Financing Activities                         30,514            1,793             (812)
                                                                       ========         ========         ========

Net Increase (Decrease) in Cash and Equivalents                          47,068            4,888           (7,372)
Cash and Equivalents at Beginning of Period                               8,389            3,501           10,873
                                                                       --------         --------         --------
Cash and Equivalents at End of Period                                  $ 55,457         $  8,389         $  3,501
                                                                       ========         ========         ========
Supplemental Disclosure of Cash Paid for:
  Interest                                                             $    403         $    813         $    771
  Income Taxes                                                         $  3,839         $     --         $    409
</TABLE>

                       See Notes to Financial Statements.

                                       23
<PAGE>

Notes to Financial Statements
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note A -- Summary of Significant Accounting Policies

The Company is a leading  specialty  retailer that introduces and sells quality,
innovative,  and  entertaining  products.  These  products  are sold through its
retail stores,  catalogs,  Internet, and other marketing channels throughout the
United   States.   The   Company   also  has  stores  and   catalog   operations
internationally through licensees.  Additional revenue is derived from rental of
the  Company's  mailing  list  and from  licensing  activities  relating  to the
Company's trade name.

Revenue Recognition:  The Company recognizes revenue at the point of sale at its
retail  stores  and at the time of  shipment  to a  customer  for its mail order
sales,  including  Internet.  The Company  provides for an allowance for returns
based upon historical  returns rate.  Deferred  revenue  represents  merchandise
certificates  outstanding  and  unfilled  cash  orders at the end of the  fiscal
period. Mailing list rental revenue is recognized when the list is fulfilled.

Accounting 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  during  the
reporting period. Actual results could differ from those estimates.

Fair  Value of  Financial  Instruments:  The  carrying  value of cash,  accounts
receivable,  accounts payable and notes payable  approximates the estimated fair
value.

Merchandise  Inventories:  Merchandise  inventories  are stated at lower of cost
(first-in, first-out method) or market.

Cash and Equivalents: Cash and equivalents represent cash and short-term, highly
liquid investments with original maturities of three months or less.

Deferred Catalog and Advertising Costs: Direct costs incurred for the production
and  distribution  of catalogs are  capitalized.  Capitalized  catalog costs are
amortized,  once the catalog is mailed,  over the expected sales period which is
generally  three months.  Other  advertising  costs are expensed as incurred and
amounted to $15,055,000,  $4,470,000, and $3,580,000, for the fiscal years ended
January 31, 2000,1999 and 1998.

Start-Up Activities: All start-up and preopening costs are expensed as incurred.

Property and Equipment:  Property and equipment are stated at cost. Depreciation
is computed using the  straight-line  method over the estimated  useful lives of
the various  assets which range from three to 10 years for office  furniture and
equipment,  and 40 years for the building.  Leasehold improvements are amortized
using the  straight-line  method over the lesser of their estimated useful lives
or the term of the applicable lease which ranges from seven to 18 years.

The Company  manufactures its own proprietary  products for sale. Costs incurred
for  tooling,dies  and package  design are  capitalized  and amortized  over the
estimated life of these  products,  which is generally two years. At January 31,
2000 and 1999,  capitalized  costs  included in property and  equipment,  net of
related amortization, were $2,631,000 and $2,239,000, respectively.

The Company reviews its long-lived  assets,  including  identifiable  intangible
assets,  whenever events or changes  indicate the carrying amount of such assets
may not be recoverable.  The Company's policy is to review the recoverability of
all assets, at a minimum,  on an annual basis.  Based on the Company's review at
January 31, 2000, no material adjustment was made to long-lived assets.

Income  Taxes:  Income  taxes are  accounted  for  using an asset and  liability
approach that requires the  recognition  of deferred tax assets and  liabilities
for the expected future tax consequences of events then known to management that
have been recognized in the Company's  consolidated  financial statements or tax
returns. In estimating future tax consequences,  all expected future events then
known to management are considered other than changes in the tax law or rates.

Stock-Based  Compensation:   The  Company  accounts  for  stockbased  awards  to
employees  using the  intrinsic  value  method in  accordance  with APB No.  25,
Accounting for Stock Issued to Employees.

Earnings Per Share: Basic earnings per share is computed as net earnings divided
by the weighted average number of common shares  outstanding during each year of
10,516,358, and 8,532,588, and 8,303,425, for the fiscal years ended January 31,
2000, 1999 and 1998.  Diluted earnings per share reflects the potential dilution
that could occur from common shares  issuable  through stock  options.  Weighted
average  number of common  shares  outstanding  was adjusted  for  841,646,  and
540,244, and 233,607 incremental shares assumed issued on the exercise of common
stock during the fiscal years ended January 31, 2000, 1999 and 1998.

Options for which the exercise  price was greater than the average  market price
of common stock for the period were not included in the  computation  of diluted
earnings per share.  The number of such options for which the exercise price was
greater than the average market price of $11.92,  $6.66 and $3.56 for the fiscal
years ended January 31, 2000,  1999 and 1998, was 9,000,  and 14,000 and 97,500,
respectively.

Comprehensive  Income: In 1998, the Company  implemented  Statement of Financial
Accounting   Standards   (SFAS)  No.  130,   Reporting   Comprehensive   Income.
Comprehensive income consists of net earnings or loss for the current period and
other comprehensive income (income,  expenses,  gains, and losses that currently
bypass the income statement and are reported directly as a separate component of
equity).  Comprehensive income does not differ from net earnings for the Company
for the years ended January 31, 2000, 1999 and 1998.

New Accounting Standards: In June 1999, the Financial Accounting Standards Board
("FASB") issued SFAS No. 137, "Accounting for Derivative  Instruments." SEAS 137
extends  the  effective  date  of  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities."  SFAS  133  establishes  accounting  and
reporting  standards for derivative  instruments,  including certain  derivative
instruments  embedded  in  other  contracts,  and for  hedging  activities.  The
statement requires that an entity recognize all derivatives as either assets or-
liabilities in the statement of financial position and measure those instruments
at fair value.  As amended by SFAS 137,  SFAS 133 is effective  for fiscal years
beginning after June 15, 2000 and is not to be applied retroactively. Management
has not vet  determined  the potential  effects of SFAS No. 133 on the Company's
financial position or results of operations.

                                       24
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note A -- Summary of Significant Accounting Policies (continued)

Reclassification:  Certain  reclassifications  have  been  made to prior  years'
financial statements in order to conform with the classifications of the January
31, 2000, financial statements.

Note B -- Property and Equipment

Property and equipment is summarized as follows:

                                               Fiscal Year Ended January 31,
                                              -------------------------------
                                                  2000               1999
Dollars in thousands                          (Fiscal 1999)      (Fiscal 1998)
------------------------------------------------------------------------------
Leasehold improvements                           $25,494            $25,419
Office furniture and equipment                    42,117             35,482
Land                                                  53                 53
Building                                           2,874              2,874
                                                 -------            -------
                                                  70,538             63,828
Less accumulated depreciation
   and amortization                               46,577             41,315
                                                 -------            -------
                                                 $23,961            $22,513
                                                 =======            =======

Note C -- Other Assets

The  Company has an  agreement  under  which it will  advance the  premiums on a
split-dollar life insurance policy for its Chairman of the Board,  Founder,  and
Chief Executive  Officer.  The Company has an interest in the insurance benefits
equal to the amount of the premiums advanced. The amount receivable for premiums
advanced  as of  January  31,  2000,  and  1999  was  $1,120,000  and  $766,000,
respectively.

Note D -- Revolving Loan and Notes Payable

The Company has a revolving  secured  credit  facility  which expires  September
2003.  The credit  facility  has been  amended on several  occasions  and, as of
January 31, 2000, the agreement allows Company  borrowings and letters of credit
up to a maximum of $31  million  for the period  from  October 1, 2000,  through
December  31,  2000,  and up to $20 million for other times of the year based on
inventory  levels.  The credit  facility is secured by the Company's  inventory,
accounts  receivable,  general intangibles and certain other assets.  Borrowings
under  this  facility  bear  interest  at either the prime rate plus 0.25% or at
LIBOR plus 2.25% per annum, but may change determined by financial  performance.
The credit facility contains certain financial covenants  pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings,  dividend  payments  and stock  repurchases.  For the  period  ended
January 31, 2000 and 1999, the Company was in compliance with all covenants.

Subsequent  to  January  31,  2000,  an  amendment  to the credit  facility  was
completed  to set lower  interest  rates and to extend  the  expiration  date to
September 2004.  Borrowings  under the credit facility will now bear interest at
either the prime rate per annum or at LIBOR  plus 1.5% per annum  determined  by
financial  performance.  The credit facility allows seasonal borrowings of up to
$31 million for the period October 1 through December 31, 2000, increasing by $1
million for this period in each of the two  subsequent  years,  and remaining at
$33 million for this period the following  year. At January 31, 2000,  and 1999,
the Company had no amounts  outstanding on its revolving  loan credit  facility.
Letter of credit  commitments as of January 31, 2000,  and 1999 were  $3,192,000
and $4,108,000, respectively.

In  addition,   the  credit  facility   provides  for  term  loans  for  capital
expenditures  (Term Loans) up to an aggregate of $2.5 million.  Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
(9.0% at January  31,  2000) per annum or at LIBOR plus 2.50% per annum based on
financial  performance.  Each  Term  Loan is to be  repaid  in 36 equal  monthly
principal  installments.  At January 31, 1999,  the balance of the Term Loan was
$500,000 which was paid off in fiscal 1999.

Notes  payable  included  a  mortgage  loan   collateralized  by  the  Company's
distribution center. This note bears interest at a fixed rate of 8.40%, provides
for monthly  payments of principal  and  interest in the amount of $29,367,  and
matures in January 2011. At January 31, 2000, and 1999, the balance of this note
was $2,513,000 and $2,648,000, respectively.

Future minimum  principal  payments on notes payable at January 31, 2000, are as
follows:

Dollars in thousands
--------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2001                                                                      $  147
2002                                                                         160
2003                                                                         173
2004                                                                         189
2005                                                                         205
Later years                                                                1,639
                                                                          ------
Total notes payable                                                       $2,513
                                                                          ======

                                       25
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note E -- Income Taxes
                                           Fiscal Year Ended January 31,
                                   ---------------------------------------------
                                        2000           1999            1998
Dollars in thousands               (Fiscal 1999)   (Fiscal 1998)   (Fiscal 1997)
--------------------------------------------------------------------------------
Currently payable (refundable):
   Federal                            $ 6,430         $ 3,848         $(1,036)
   State                                1,135             679            (183)
                                      -------         -------         -------
                                        7,565           4,527          (1,219)
Deferred:
   Federal                             (1,147)         (1,240)          1,372
   State                                 (202)           (219)            242
                                      -------         -------         -------
                                       (1,349)         (1,459)          1,614
                                      -------         -------         -------
                                      $ 6,216         $ 3,068         $   395
                                      =======         =======         =======

The  difference  between  the  effective  income tax rate and the United  States
federal income tax rate is summarized as follows:

                                           Fiscal Year Ended January 31,
                                   ---------------------------------------------
                                        2000           1999            1998
                                   (Fiscal 1999)   (Fiscal 1998)   (Fiscal 1997)
--------------------------------------------------------------------------------

Federal tax rate                       34.0%           34.0%           34.0%
State income tax,
less federal benefit                    6.0             6.0             6.0
                                       ----            ----            ----
Effective tax rate                     40.0%           40.0%           40.0%
                                       ====            ====            ====

Deferred taxes result from  differences in the recognition of expense for income
tax and financial reporting purposes.  Temporary  differences which give rise to
deferred tax assets (liabilities) are as follows:
                                                            January 31,
                                                  ------------------------------
                                                      2000              1999
Dollars in thousands                              (Fiscal 1999)    (Fiscal 1998)
--------------------------------------------------------------------------------
Current:
   Nondeductible reserves                           $ 4,966           $ 4,123
   Deferred catalog costs                            (1,232)             (981)
   State taxes                                         (332)             (755)
                                                    -------           -------
Current -- net                                        3,402             2,387
                                                    =======           =======
Noncurrent:
   Deferred rent                                      1,049             1,198
   Depreciation                                       3,474             2,967
   Deductible software costs                         (1,168)           (1,127)
   Other -- net                                        (157)             (173)
                                                    -------           -------
Noncurrent -- net                                     3,198             2,865
                                                    =======           =======
Total                                               $ 6,600           $ 5,252
                                                    =======           =======

Note F -- Leases

The Company leases its offices, retail facilities, and equipment under operating
leases for terms  expiring at various  dates  through  2008.  Under the terms of
certain of the leases,  rents are adjusted  annually for changes in the consumer
price index and increases in property taxes. The aggregate  minimum annual lease
payments under leases in effect at January 31, 2000, are as follows:

Dollars in thousands
--------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2001                                                                     $15,775
2002                                                                      11,994
2003                                                                      11,625
2004                                                                      10,871
2005                                                                       9,618
Later years                                                               18,658
                                                                         -------
Total minimum lease commitments                                          $78,541
                                                                         =======

Many of the Company's  leases  contain  predetermined  fixed  escalations of the
minimum  rentals  during the initial  term.  For these  leases,  the Company has
recognized the related rental expense on a straight-line  basis and has recorded
the difference  between the expense  charged to income and amounts payable under
the leases as deferred rent which is included in Other Liabilities.

Some store leases contain  renewal options for periods ranging up to five years.
Most leases also provide for payment of operating  expenses,  real estate taxes,
and for additional rent based on a percentage of sales.

Net rental expense for all operating leases was as follows:

                                           Fiscal Year Ended January 31,
                                   ---------------------------------------------
                                        2000           1999            1998
Dollars in thousands               (Fiscal 1999)   (Fiscal 1998)   (Fiscal 1997)
--------------------------------------------------------------------------------

Minimum rentals                      $16,146          $15,273         $13,812
Percentage rentals
and other charges                      6,367            5,914           5,559
                                     -------          -------         -------
                                     $22,513          $21,187         $19,371
                                     =======          =======         =======

                                       26
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note G - Stockholders' Equity

On July 22, 1999, the Company completed an offering of 3.0 million shares of its
common stock, all of which shares were offered by the Company. The proceeds from
the offering, net of underwriters discount and offering expenses,  totaled $30.2
million.  The Company intends to use the proceeds from this offering for general
corporate  purposes,  including  investments in the Company's Internet business,
expansion of its distribution and fulfillment capacity, and working capital.

Under the Company's stock repurchase  program,  the Company is authorized by its
Board of Directors to  repurchase  up to  $1,600,000  of common  stock.  Through
January 31, 1998,  the Company has  repurchased a total of 186,100  shares at an
average price of $5.95 per share.  No shares were  repurchased in fiscal 1999 or
1998.

Under the Company's 1985 Stock Option Plan, as amended, non-qualified options to
purchase common stock are granted to officers, key employees and consultants, up
to an  aggregate  3,155,000  shares.  Options  generally  vest  over a four-  to
six-year  period  from the date of the grant and are  priced at 100% of the fair
market value at the date of the grant.  The Stock Option Plan limits the maximum
number of shares any one  individual  may be granted per fiscal year, and allows
individuals  owning more than 25% of the Company's common stock to receive stock
options. Nonemployee members of the Board are ineligible to receive stock option
grants under this plan.

The Company also has the 1994  Non-Employee  Directors  Stock  Option  Plan,  as
amended and approved by stockholders, to allow for stock option grants of common
stock to the non-employee members of the Board of Directors,  up to an aggregate
250,000 shares. Options will be immediately  exercisable,  vest over one year of
Board  service  from the date of the  grant,  and are priced at 100% of the fair
market  value at the date of the grant.  Any shares  purchased  under the option
plan will be subject to repurchase by the Company at the exercise price paid per
share, upon the optionee's cessation of Board service prior to vesting.

At January 31, 2000, the Company had reserved 124,785 shares and 187,000 shares,
under the 1985  Stock  Option  Plan and the 1994  Non-Employee  Directors  Stock
Option Plan, respectively, for the granting of additional stock options.

Additional Stock Plan Information

As  discussed in Note A, the Company  continues  to account for its  stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board  No.  25,  Accounting  for  Stock  Issued to  Employees,  and its  related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.

Statement of  Financial  Accounting  Standards  (SFAS) No. 123,  Accounting  for
Stock-Based  Compensation,  requires  the  disclosure  of pro forma net earnings
(loss) and  earnings  (loss) per share had the  Company  adopted  the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based  awards to employees is calculated through the use of option pricing
models,  even though such models were  developed  to estimate  the fair value of
freely tradable, fully transferable options -without vesting restrictions, which
significantly differ from the Company's stock option awards.

These models also require subjective  assumptions,  including future stock price
volatility  and expected time to exercise,  which greatly  affect the calculated
values.  The Company's  calculations  were made using the  Black-Scholes  option
pricing model with the following  weighted  average  assumptions:  expected life
from date of grant, six years in fiscal 1999, and five years in both fiscal 1998
and 1997; stock volatility, 57% in fiscal 1999, and 51 % in both fiscal 1998 and
1997;  risk-free interest rates, 5.70% in fiscal 1999, 5.12% in fiscal 1998, and
6.10% in fiscal 1997; and no dividends during the expected term.

The Company's  calculations are based on a single option valuation approach, and
forfeitures  are  recognized  as they occur.  If the computed fair values of the
fiscal  years 1995  through  1999 awards had been  amortized to expense over the
vesting period of the awards,  pro forma net earnings would have been $8,324,490
($0.79 earnings per share -basic and $0.73 earnings per share diluted) in fiscal
1999,  $4,338,715 ($0.51 earnings per share-basic and $0.48 earnings per share -
diluted) in fiscal 1998, and $383,000 ($0.05 earnings per share -basic and 50.04
earnings per share -diluted) in fiscal 1997. However,  the impact of outstanding
non-vested stock options granted prior to fiscal 1995 has been excluded from the
pro forma calculation; accordingly, the fiscal 1999, fiscal 1998 and fiscal 1997
pro forma adjustments are not necessarily  indicative of future period pro forma
adjustments,  when the  calculation  will apply to all future  applicable  stock
options.

                                       27
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note G -- Stockholders' Equity (continued)

The following table reflects the activity under these plans:


                                                                     Weighted
                                                      Number of      Average
                                                       Options    Exercise Price
--------------------------------------------------------------------------------

Balance at January 31, 1997                           1,504,500       $3.13
  Granted (weighted average fair value of $1.81)        129,300        3.24
  Exercised                                            (124,340)       1.92
  Cancelled                                             (71,260)       3.83
                                                     ----------

Balance at January 31, 1998                           1,438,200        3.21
  Granted (weighted average fair value of $2.07)        463,000        4.05
  Exercised                                            (410,715)       2.39
  Cancelled                                            (345,380)       3.48
                                                     ----------

Balance at January 31, 1999                           1,145,105        3.76
  Granted (weighted average fair value of $5.41)      1,228,100        9.28
  Exercised                                             (99,832)       4.11
  Cancelled                                            (167,385)       3.78
                                                     ----------
Balance at January 31, 2000                           2,105,988       $6.96
                                                     ==========

Exercisable at January 31, 1998                         591,000       $2.73
                                                     ==========
Exercisable at January 31, 1999                         379,000       $3.58
                                                     ==========
Exercisable at January 31, 2000                         531,391       $4.39
                                                     ==========
<TABLE>
<CAPTION>
                      Options Outstanding                                      Options Exercisable
-----------------------------------------------------------------------    ----------------------------
                     Number          Weighted Average      Weighted          Number        Weighted
   Range of        of Options     Remaining Contractual     Average        of Options       Average
Exercise Prices    Outstanding         Life (years)      Exercise Price    Exercisable   Exercise Price
-----------------------------------------------------------------------    ----------------------------
<S>                <C>                   <C>              <C>               <C>            <C>
$ 1.16-$1.99         16,015                2.9              $ 1.88            16,015         $ 1.88
  2.00-3.99         791,489                7.8                3.70           440,542           3.72
  4.00-7.99          78,384                8.5                4.94            23,384           5.16
  8.00-11.99      1,211,100               10.0                9.22            49,450          10.38
 11.99-17.00          9,000               10.0               15.91             2,000          17.00
                  ---------                                                  -------
$ 1.16-$17.00     2,105,988                9.1              $ 6.96           531,391         $ 4.39
                  =========                                                  =======
</TABLE>

Note H -- 401k Savings Plan

The Company maintains a defined  contribution,  401k Savings Plan,  covering all
employees  who have  completed one year of service with at least 1,000 hours and
who  are at  least  21  years  of  age.  The  Company  makes  employer  matching
contributions  at its discretion.  Company  contributions  amounted to $152,000,
$73,000 and $77,000 for the fiscal years ended January 31, 2000,  1999 and 1998,
respectively.

Note I -- Commitments and Contingencies

The Company is party to various legal  proceedings  arising from normal business
activities.  Management  believes that the  resolution of these matters will not
have an adverse material effect on the Company's  financial  position or results
of operations.

                                       28
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note J -- Segment Information

The Company  classifies its business  interests into three reportable  segments:
retail stores, catalog and Internet. The accounting policies of the segments are
the same as those  described in the summary of significant  accounting  policies
(Note A). The Company  evaluates  performance  and allocates  resources based on
operating  contribution,   which  excludes  unallocated  corporate  general  and
administrative costs and income tax expense or benefit. The Company's reportable
segments are strategic  business  units that offer the same products and utilize
common merchandising,  distribution,  and marketing functions, as well as common
information  systems and  corporate  administration.  The Company  does not have
intersegment sales, but the segments are managed separately because each segment
has different channels for selling the products.

Financial information for the Company's business segments is as follows:

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended January 31,
                                         -------------------------------------------------
                                             2000              1999              1998
Dollars in thousands                     (Fiscal 1999)     (Fiscal 1998)     (Fiscal 1997)
------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>
Revenues
Stores                                     $ 188,416         $ 162,371         $ 151,589
Catalog                                       65,617            70,750            58,772
Internet                                      28,495             4,922             1,633
Other                                         11,837             5,071             4,821
                                           ---------         ---------         ---------
Total Revenues                             $ 294,365         $ 243,114         $ 216,815
                                           =========         =========         =========
Operating Contributions
Stores                                     $  27,947         $  19,405         $  15,170
Catalog                                        9,134             9,632             4,090
Internet                                       3,193               659               160
Unallocated                                  (24,733)          (22,026)          (18,432)
                                           ---------         ---------         ---------
Earnings Before Income Tax                 $  15,541         $   7,670         $     988
                                           =========         =========         =========
Depreciation and Amortization
Stores                                     $   3,534         $   2,812         $   2,516
Catalog                                           --                --                --
Internet                                          14                 1                --
Unallocated                                    2,932             2,214             1,818
                                           ---------         ---------         ---------
Total Depreciation and Amortization        $   6,480         $   5,027         $   4,334
                                           =========         =========         =========
Capital Asset Expenditures
Stores                                     $   3,561         $   5,988         $   2,722
Catalog                                           --                --                --
Internet                                         425                38                --
Unallocated                                    4,053             2,405             1,715
                                           ---------         ---------         ---------
Total Capital Asset Expenditures           $   8,039         $   8,431         $   4,437
                                           =========         =========         =========
Assets
Stores                                     $  13,590         $  13,673         $  11,564
Catalog                                           --                --                --
Internet                                         448                37                --
Unallocated                                  128,081            68,335            67,098
                                           ---------         ---------         ---------
Total Assets                               $ 142,119         $  82,045         $  78,662
                                           =========         =========         =========
</TABLE>

                                       29
<PAGE>

Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 2000, 1999 and 1998

Note K -- Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>

Dollars in thousands except per share amounts                              Three Months Ended
                                                   -------------------------------------------------------------
                                                   April 30,        July 31,        October 31,      January 31,
Fiscal Year Ended January 31, 2000                   1999             1999             1999             2000
----------------------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>               <C>             <C>
Revenues                                           $ 40,859         $ 57,704          $58,280         $137,522
Expenses
Cost of products                                     20,280           28,355           29,384           65,663
Buying and occupancy                                  6,748            6,887            6,934            7,273
Advertising and promotion                             4,234            8,193            6,619           18,946
General, selling and administrative                  12,413           14,332           15,286           27,822
Other income (expense)                                  (36)            (107)             190              498
Earnings (loss) before income tax (benefit)          (2,852)            (170)             247           18,316
Income tax (benefit)                                 (1,141)             (68)              99            7,326
Net earnings (loss)                                $ (1,711)        $   (102)         $   148         $ 10,990
Net earnings (loss) per share - Basic(1)           $  (0.19)        $  (0.01)*        $  0.01*        $   0.92*
                                Diluted(2)         $  (0.19)        $  (0.01)*        $  0.01*        $   0.83*


Dollars in thousands except per share amounts                              Three Months Ended
                                                   -------------------------------------------------------------
                                                   April 30,        July 31,        October 31,      January 31,
Fiscal Year Ended January 31, 1999                   1998             1998             1998             1999
----------------------------------------------------------------------------------------------------------------

Revenues                                           $ 39,751         $ 49,532         $ 42,955         $ 110,876
Expenses
Cost of products                                     20,743           25,780           22,404            54,204
Buying and occupancy                                  6,337            6,261            6,397             7,158
Advertising and promotion                             4,512            6,904            4,906            11,074
General, selling and administrative                  11,646           12,383           12,285            22,692
Other income (expense)                                 (163)            (176)             603               (22)
Earnings (loss) before income tax (benefit)          (3,650)          (1,972)          (2,434)           15,726
Income tax (benefit)                                 (1,460)            (789)            (974)            6,291
Net earnings (loss)                                $ (2,190)        $ (1,183)        $ (1,460)        $   9,435
Net earnings (loss) per share - Basic(1)           $  (0.26)        $  (0.14)        $  (0.17)        $    1.08
                                Diluted(2)         $  (0.26)        $  (0.14)        $  (0.17)        $    0.98
</TABLE>

* Includes the  weighted  average  impact of 3.0 million  shares of common stock
issued in connection with the secondary offering dated July 22, 1999.

(1) Basic  earnings per share is calculated  for interim  periods  including the
effect of stock options  exercised in prior interim periods.  Basic earnings per
share for the fiscal year is calculated using weighted shares  outstanding based
on the date stock options were  exercised.  Therefore,  basic earnings per share
for the  cumulative  four quarters may not equal fiscal year basic  earnings per
share.

(2) Diluted net earnings per share for the fiscal year and for quarters with net
earnings are computed based on weighted average common shares  outstanding which
include  common  stock  equivalents  (stock  options).  Net loss per  share  for
quarters  with net losses is computed  based solely on weighted  average  common
shares  outstanding.  Therefore,  the net  earnings  (loss)  per  share for each
quarter do not sum up to the earnings per share for the full fiscal year.

                                       30
<PAGE>

--------------------------------------------------------------------------------
Sharper Image Corporation


Board of Directors
--------------------------------------------------------------------------------
Richard Thalheimer                         Gerald Napier
Founder                                    Retired President of
Chairman of the Board                      I. Magnin and Company
Chief Executive Officer
                                           George James
Alan Thalheimer                            Retired Senior Vice President
Retired Business Executive                 and Chief Financial Officer,
                                           Levi Strauss & Co.
Morton David
Retired Chairman, President, and
Chief Executive Officer,
Franklin Electronic Publishers, Inc.

Officers
--------------------------------------------------------------------------------
Richard Thalheimer                         Robert Thompson
Founder                                    Senior Vice President
Chairman of the Board                      Merchandising
Chief Executive Officer
                                           Joe Williams
Tracy Wan                                  Senior Vice President
President                                  Loss Prevention
Chief Operating Officer
                                           Roger Bensinger
Greg Alexander                             Vice President
Senior Vice President                      Business Development
Management Information Systems
                                           William Feroe
Tony Farrell                               Vice President
Senior Vice President                      Merchandise Planning
Creative Services                          and Allocation

Jeff Forgan                                Tom Krysiak
Senior Vice President                      Vice President
Chief Financial Officer                    Sharper Image Design
Corporate Secretary
                                           Robert Pintane
Barry Jacobsen                             Vice President
Senior Vice President                      Product Development
Distribution
                                           Craig Trabeaux
Charles Taylor                             Vice President
Senior Vice President                      Stores
Sharper Image Design

Corporate Information
--------------------------------------------------------------------------------
Corporate Headquarters                     SEC Form 10-K
650 Davis Street                           A  copy  of  the  Company's  annual
San Francisco, CA 94111                    report   to  the   Securities   and
Telephone (415) 445-6000                   Exchange  Commission  of Form  10-K
FAX: (415) 445-1574                        (exclusive    of    exhibits)    is
                                           available   without   charge   upon
Transfer Agent and                         written request to:
Registrar                                       Investor Relations
                                                The Sharper Image
Chase Mellon Shareholder                        650 Davis Street
Services LLC                                    San Francisco, CA 94111
85 Challenger Road
Overbeck Center                            Annual Meeting
Ridgefield Park, NJ 07660                  The Annual Meeting of  Stockholders
                                           of Sharper Image  Corporation  will
Corporate Counsel                          be held on Monday,  June 12,  2000,
Brobeck, Phleger & Harrison LLP            at 10 a.m. at the World Trade Club,
One Market                                 Ferry Building,
Spear Street Tower                         San Francisco, California.
San Francisco, CA 94105

Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105

Common Stock Market
Prices and Dividend Policy
--------------------------------------------------------------------------------
The common stock of Sharper Image  Corporation is traded in the Nasdaq  National
Market under the symbol SHRP.  The following  table sets forth,  for the periods
indicated, the range of high and low prices reported for the common stock.

The Company has not paid cash dividends to holders of its common stock.

                           Fiscal Year 1999              Fiscal Year 1998
                          High           Low            High           Low
First Quarter            17 3/16        9 5/8          11 5/8         4 1/16
Second Quarter           12 1/2         8               8 3/8         4 11/16
Third Quarter            14 3/8         8 7/8           5 5/8         2 1/2
Fourth Quarter           23 1/2         8 3/4          25             3 3/4


Independent Auditors' Report
--------------------------------------------------------------------------------
Board of Directors
Sharper Image Corporation
San Francisco, California

We have audited the accompanying  balance sheets of Sharper Image Corporation as
of January  31,  2000,  and 1999,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for each of the three  fiscal  years in the
period ended January 31, 2000. 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 auditing standards generally accepted
in the  United  States of  America.  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,  such  financial  statements  present  fairly,  in all material
respects,  the financial position of Sharper Image Corporation as of January 31,
2000, and 1999, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 2000, in conformity  with
accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
                                                       [Deloitte & Touche Logo]
San Francisco, California
March 24, 2000

                                       31
<PAGE>


                    The Ionic Breeze(TM) Quadra Air Purifier
                      uses exclusive, patented electronics
                       to circulate air in total silence.
                         This top-seller was created by
                             Sharper Image Design.



                           Sharper Image Corporation
                                650 Davis Street
                            San Francisco, CA 94111
                              www.sharperimage.com


  (R)The Sharper Image is a registered trademark of Sharper Image Corporation.
     (TM) Sharper Image Design is a trademark of Sharper Image Corporation.
     Copyright (C) 2000 by Sharper Image Corporation. All rights reserved.