The 
     Sharper
      Image

1998 Annual Report


[graphic omitted]

<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 easier and more
enjoyable.

         The Company enjoys an  exceptionally  strong brand identity and, in the
consumer  marketplace,  The  Sharper  Image  name  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, are highly marketable
and  form the  foundation  of the  Company's  success  in  diverse  channels  of
distribution.

         The Company  currently  operates 89 stores in 28 states,  and generates
direct  sales from its  monthly  Sharper  Image  print  catalog  and through its
Internet Website, sharperimage.com.

         The  Company  also  sells  to other  companies  through  its  Corporate
Marketing Incentives program and its Wholesale Division.

                                                 Revenues
                                                (Millions)
                                                  Fiscal
                           1994        1995        1996        1997        1998
                           ----        ----        ----        ----        ----
Revenue from Sharper
  Image Design Products    10.4        13.8        15.1        17.6        43.4

Total Revenue             188.5       204.2       210.2       216.8       243.1


                                            Internet Revenues
                                                (Millions)
                                                  Fiscal
                           1994        1995        1996        1997        1998
                           ----        ----        ----        ----        ----
Total Revenue                 0        0.05         0.8         1.6         4.9



                                       2

<PAGE>


                           Financial Accomplishments           

Net earnings of $4.6 million, a 676 percent increase over the prior fiscal year.

Record total net revenues of $243.1 million, a 12 percent increase.

Record store sales of $162.4 million, a 7 percent increase.

Record catalog sales of $70.8 million, a 20 percent increase.

Record Internet sales of $4.9 million, a 201 percent increase.

Gross margin rate increase of 2.7 percentage points, to 49.0 percent.


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

<CAPTION>
                                                                             Fiscal Year Ended January 31,
                                                           ------------------------------------------------------------------------
                                                               1999           1998           1997            1996           1995
                                                          (Fiscal 1998)  (Fiscal 1997)  (Fiscal 1996)   (Fiscal 1995)  (Fiscal 1994)
                                                           ------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>             <C>            <C>        
Operating Results
Revenues                                                   $   243,114    $   216,815    $   210,245     $   204,184    $   188,535
Provision for loss on the closure of
         the SPA Collection division                              --             --           (8,000)           --             --
Earnings (loss) before income taxes                              7,670            988         (7,241)            739          6,139
Net earnings (loss)                                              4,602            593         (4,345)            444          3,683
Net earnings (loss) per share - Basic                      $      0.54    $      0.07    $     (0.53)    $      0.05    $      0.44
                                Diluted                    $      0.51    $      0.07    $     (0.53)    $      0.05    $      0.41

Balance Sheet Data
Working capital                                            $    16,003    $    11,633    $     9,429     $    17,233    $    23,011
Total assets                                                    82,045         78,662         78,804          70,456         64,036
Long term notes payable                                          2,513          3,299          4,245           3,355            838
Stockholders' equity                                            36,649         29,156         28,449          32,758         32,792
Current ratio                                                     1.40           1.27           1.22            1.56           1.85

Statistics
Number of stores at year end                                        87             85             82(1)           78(1)          74
Comparable store sales                                             5.3%           1.1%          (2.1%)           3.3%          17.8%
Annualized net sales per square foot                       $       484    $       465    $       458     $       473    $       468
Number of catalogs mailed                                   44,398,000(2)  44,544,000(2)  37,695,000(2)   32,780,000(2)  31,522,000
Number of catalog orders(3)                                    564,000        422,000        470,000         536,000        426,000
Average revenue per transaction:
         Stores                                            $       102    $       104    $        97     $       106    $       102
         Catalog(3)                                        $       141(4) $       158(4) $       134(4)  $       122    $       116
Returns on average stockholders' equity                           14.0%           2.1%           N/A             1.4%          11.8%
Book value per share                                       $      4.30    $      3.51    $      3.44     $      3.97    $      3.96
Weighted average number of shares outstanding -
                  Basic                                      8,532,588      8,303,425      8,260,208       8,249,259      8,294,378
                  Diluted                                    9,072,832      8,537,032      8,260,208       8,682,078      8,899,289

<FN>
     Dollars  are  in  thousands  except  Net  earnings  (loss)  per  share  and
     Statistics.
(1)  Excludes six and four SPA Collection stores at January 31, 1997 and 1996.
(2)  Includes  3,060,000,  6,283,000  and  2,900,000  of The Sharper  Image Home
     Collection   catalogs   mailed  for  January  31,  1999,   1998  and  1997,
     respectively.  Excludes SPA Collection catalogs mailed for January 31, 1997
     and 1996. 
(3)  Includes  Internet  transactions.  
(4)  Excludes The Sharper Image Home  Collection  which had average  revenue per
     order  of  $717,  $678  and  $577 for  January  31,  1999,  1998 and  1997,
     respectively.
</FN>
</TABLE>

                                       3

<PAGE>
To Our Shareholders

         By every measure,  1998 was an excellent year for The Sharper Image. We
generated  record  revenues  of $243.1  million  and  significantly  higher  net
earnings of $4.6  million,  or $0.51 per share.  Compared  with the prior fiscal
year,  revenues  grew 12%,  from last year's  $216.8  million,  and net earnings
increased sevenfold, from last year's $593,000, or $0.07 per share.

         Key to these  achievements was the unprecedented  popularity of Sharper
Image Design proprietary products,  which fueled a surge in fourth quarter sales
and pushed the year's gross margin rate nearly three  percentage  points higher.
Sharper Image Design's product development know-how -- combined with our brand's
strength and our marketing  competence in stores,  catalog,  and the Internet --
lays the foundation for our Company's bright future.

         I'm especially  gratified  that each area of our business  performed at
record levels.  Store sales grew seven percent,  to a record $162.4 million,  as
comparable  store sales  increased  five  percent.  Sharper  Image catalog sales
gained 20 percent,  to a record  $70.8  million.  Corporate  Marketing  achieved
record revenues of $15 million,  a 5 percent gain. (These sales are incorporated
into  the  sales  from our  stores  and  catalogs.)  And of  greatest  strategic
importance, our Internet e-commerce generated sales of $4.9 million, a threefold
increase over last year's $1.6 million.

         The efforts of our entire team of associates throughout the year led to
a sensational holiday season and the highest fourth quarter revenues and highest
fourth quarter earnings in our Company's history.  This outstanding  achievement
gave us great momentum going into 1999.

Sharper Image Design

         Our success in 1998 was significantly linked, in every instance, to our
product  development  capabilities.  The summer  launch of the Personal  Cooling
System(TM) signaled a new level of consumer acceptance of Sharper Image Design's
innovations.  That  invention  -- a kind  of  wearable  "air  conditioner"  with
patented  miniaturized   evaporative   technology  --  is  unusual  but  broadly
appealing, affordable and can be found only at The Sharper Image. Its impressive
debut was followed by even more successful introductions of a diverse assortment
of products,  including the Ionic Breeze(TM) Silent Air Purifier, with exclusive
technology that circulates air in total silence;  our CD Radio/Alarm  Clock with
Sound  Soother(R),  a portable  bedside  stereo;  Weebot(TM) the Electronic Pet,
holiday's runaway best-seller; and the Ionic Bath(TM) Pet Brush, for eliminating
pet odors.

         Sharper Image Design  products  accounted for 18 percent of 1998 sales,
up from 1997's eight  percent.  Our goal for 1999 is to increase to a 25 percent
share and, combined with exclusive private-label merchandise,  these high-margin
items should account for more than 40 percent of sales.

The Internet Opportunity

         We have a vision for our Company and it's simply stated:  Sharper Image
for  everyone.  To me, it means our products  are useful,  fun and of value to a
much larger group of consumers than those we currently  count as customers.  The
Internet,  a powerful  yet  economical  marketing  channel for  reaching a wider
consumer base,  gives us the best opportunity to realize our vision and become a
much larger and more profitable company.

         We were early  entrants to  e-commerce  and our  strengths  are ideally
suited for success: our brand name, two decades of direct-marketing  experience,
and exclusive high-margin products with wide appeal. And I was thrilled to learn
from our sales data that,  during our record fourth  quarter,  70 percent of our
online buyers were "new to file," or first-time  Sharper Image customers.  We're
devoting  increased  resources,  commensurate  with  anticipated  Internet sales
growth, to make our Website a major Internet destination. Since the start of the
new  fiscal  year,  we've  launched  a  product  auction  site,   introduced  3D
interactivity,  redesigned  our  Website,  accelerated  e-mail  promotions,  and
initiated an aggressive advertising program. Our goal in 1999 is to increase our
Internet sales fourfold over 1998 and we're well on our way to achieving that.

A Bright Future

         This  remarkable  year,  the  result  of  a  carefully   conceived  and
well-executed  long-term  strategy,  demonstrated  to me that our Company has an
exceptionally  bright future. My most sincere thanks go out to the great team of
skilled,  experienced,  talented associates who made it happen. And on behalf of
our  entire  Company,  I want to  express  my  heartfelt  appreciation  for your
support.

Sincerely,
                                                               [Graphic Omitted]
/s/ Richard  Thalheimer
-----------------------
Richard  Thalheimer
Chairman, Founder and
Chief Executive Officer
                                       4
<PAGE>


[Graphic Omitted]

Our  best-selling  Ionic  Breeze(TM)  Silent Air Purifier was created by Sharper
Image Design using exclusive patented  technology that moves air electronically.
It's the only air purifier that circulates air absolutely silently.

                                       5

<PAGE>


SHARPER IMAGE DESIGN

Sharper Image Design  products are conceived,  designed,  engineered,  packaged,
contract manufactured and marketed solely by the Company. This ability to create
proprietary  products  is  our  greatest  strategic  advantage.   Our  exclusive
merchandise  is  designed  to have wide appeal and allows the Company to broaden
its base of customers.  Led by founder and CEO Richard  Thalheimer,  and Sharper
Image Design Vice President,  Charles Taylor, this experienced team has superior
expertise and know-how in the  development of a wide range of  innovative,  high
quality  products  --  many   incorporating   patented   technologies  that  are
unavailable to competitors. More than a dozen Sharper Image Design products were
introduced  in 1998.  Several had  extraordinary  debuts:  The Personal  Cooling
System(TM) was the number-one seller in summer.  The Ionic Breeze(TM) Silent Air
Purifier,  number one in fall. The CD Radio/Alarm  Clock with Sound  Soother(R),
number one in November.  The Weebot(TM)  Electronic Pet, number one in December.
Sharper Image Design was key to the year's  exceptional  financial  performance,
accounting  for 18 percent of sales and an even greater  share of gross  margin.
Our customers  enjoy great value,  utility and fun; we enjoy market  exclusivity
and  much  higher  gross  margins.  We are  accelerating  the  pace  of  product
development  because  Sharper Image Design  proprietary  products are key to our
sales and earnings growth.

[Graphic Omitted]
Ionic Shoe Freshener(TM)

[Graphic Omitted]
Dreamlight(TM) Sound-Activated Light Show

[Graphic Omitted]
PowerFlow(TM) Height-Enhancing Insoles

[Graphic Omitted]
Key Organizer with Clock and Calendar

                                       6

<PAGE>



[Graphic Omitted]
Personal Cooling System(TM) 

[Graphic Omitted]
Voice Activated Auto Dialer(TM)

[Graphic Omitted]
Ionic Clothes Freshener(TM)

[Graphic Omitted]
Personal Humidifier

[Graphic Omitted]
Telephone with Truth.Quest(TM) Function

[Graphic Omitted]
Ultra Heart and Sound Soother(R)

[Graphic Omitted]
Ionic Bath(TM) Pet Brush

[Graphic Omitted]
Ionic Closet Dry Cleaner(TM)

[Graphic Omitted]
AM/FM Companion(TM) with Smoke Alarm

[Graphic Omitted]
Shower Companion(TM) Plus

[Graphic Omitted]
Turbo-Groomer(TM)

[Graphic Omitted]
Digital Auto-Drive(R) Tie Rack

                                       7

<PAGE>


Sharper Image for Everyone

         More  than two  decades  of  visionary  merchandising  and  imaginative
marketing have made The Sharper Image one of the most widely  recognized  brands
-- an enduring American icon that conveys genuine  enthusiasm for well-designed,
technologically innovative products that make life easier and more enjoyable.

         Our aim is to build on our brand's strengths and multichannel  know-how
to reach a larger  base of  customers  with  proprietary  Sharper  Image  Design
products.  These  exclusive  items are unique  yet  broadly  appealing,  fun yet
useful, sophisticated yet affordable.

[Graphic Omitted]

Internet: sharperimage.com

         Our goal is to make our  online  store at  sharperimage.com  a  leading
Internet  destination -- a fun, exciting place to visit, shop and buy. Increased
1998 exposure of our Website's Internet address in our stores, catalog and print
advertising, plus a series of successful e-mail promotions to our online buyers,
helped our Website achieve sales gains of 400 percent during the holiday season,
driven by 70 percent new Sharper Image customers.

         Aggressive  development  efforts led to  successful  1999 launches of a
colorful new design for our Website,  a dynamic  Internet auction site, and, for
Sharper Image Design products, 3D enriched  presentations with interactivity and
sound --  introduced  with great  fanfare at the  global  debut of the  Intel(R)
Pentium(R) III processor.

         The   Internet  is  our  fastest   growing   channel  and  our  biggest
opportunity,  and we are seizing it aggressively  with greater human and capital
resources.  All internal and external  indicators point to an exceptional future
in e-commerce.

Sharper Image Catalog

         Our  award-winning  catalog  is The  Sharper  Image to loyal  customers
around the world. The catalog was the key to building the brand, and direct mail
is a  large,  profitable,  thriving  part  of our  business  and  our  principal
advertising  vehicle.  We mailed more Sharper Image catalogs than ever before in
1998  --more  than 41 million -- and  enjoyed  significant  increases  in sales,
orders and profitability.

Sharper Image Stores

         Our 89 stores are a big and growing  part of our  business,  accounting
for nearly 70  percent of  revenues.  This year,  we opened  four new stores and
remodeled four with a

                                       8

<PAGE>


[Graphic Omitted]

great-looking new store design that feels fresh and inviting -- a welcome change
that  dramatically  highlights our merchandise and appeals to both men and women
shoppers.  We plan to open five stores in 1999 and will continue to evaluate the
remodel program.

Corporate Marketing

         The Sharper  Image cachet has made us a major player in the  motivation
and reward business. We design unique reward programs in partnership with a wide
range of clients, including a number of major corporations.

Advertising: Print and  Infomercials

         To market our exclusive  proprietary products to a wider audience,  and
to promote our stores and Website,  we increased our  advertising  in major news
publications like USA Today, The Wall Street Journal, The New York Times, and in
regional newspapers and national magazines.  We tested televised  "infomercials"
with  positive  results and plan to do more in the coming  year.  Strong  brand.
Proprietary products with wide appeal.  Multiple channels.  Broad consumer base.
Our solid financial  performance in 1998 was the result of a carefully conceived
and well-executed strategy that lays out a clear path to profitable growth.


[Graphic Omitted]

Our new store design on New York's 57th Street.

                                       9

<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,
                                   ---------------------------------------------
                                        1999            1998             1997
                                   (Fiscal 1998)   (Fiscal 1997)   (Fiscal 1996)
                                   ---------------------------------------------
Revenues:
         Net store sales                66.8%           69.9%            71.0%
         Net catalog sales              29.1            27.1             25.5
         Net Internet sales              2.0             0.7              0.4
         Net wholesale sales             1.4             1.5              1.9
         List rental                     0.5             0.5              0.6
         Licensing                       0.2             0.3              0.6
                                       -----           -----            -----
Total Revenues                         100.0%          100.0%           100.0%

Costs and Expenses:
         Cost of products               50.6            53.3             51.8
         Buying and occupancy           10.8            11.0             11.4
         Advertising and
              promotion                 11.2            10.5             12.2
         General, selling,
              and administrative        24.3            24.5             24.1
         Provision for loss due to
              closure of SPA
              Collection division         --                              3.8
                                       -----           -----            -----
Operating Income (Loss)                  3.1             0.7             (3.3)
Other Income (Expense)                   0.1            (0.2)            (0.2)
                                       -----           -----            -----
Earnings (Loss) Before
Income Tax (Benefit)                     3.2             0.5             (3.5)
Income Tax (Benefit)                     1.3             0.2             (1.4)
                                       -----           -----            -----
Net Earnings (Loss)                      1.9%            0.3%            (2.1)%
                                       -----           -----            -----


Revenues
                                        Fiscal Year Ended Jan. 31,
                              --------------------------------------------------
                                   1999              1998               1997
Dollars in thousands          (Fiscal 1998)     (Fiscal 1997)      (Fiscal 1996)
                              --------------------------------------------------
Net store sales                  $162,371          $151,589          $149,321
Net catalog sales                  70,750            58,772            53,577
Net Internet sales                  4,922             1,633               843
Net wholesale sales                 3,464             3,199             4,029
                                 --------          --------          --------
Total Net Sales                   241,507           215,193           207,770
List rental                         1,088               982             1,177
Licensing                             519               640             1,298
                                 --------          --------          --------
Total Revenues                   $243,114          $216,815          $210,245
                                 ========          ========          ========


         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%, and net wholesale  sales increased  $265,000,  or 8.3%, as
compared  to fiscal  1997.  Management  believes  that the  introduction  of new
Sharper  Image Design  proprietary  products was key to the  achievement  of the
growth in total net sales.

         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 sales per average  square foot
increased to $484 for fiscal  1998,  compared to $465 in fiscal 1997 and $458 in
fiscal 1996. The Company's store sales  productivity has increased over the past
two years and compares  favorably  with the retail  industry's  specialty  store
(hard goods)  average per square foot of $168 for fiscal  1997,  $343 for fiscal
1996,  and $252 for fiscal 1995  (statistical  information  per National  Retail
Federation-data for 1998 is not yet available).

         Net catalog sales 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 and catalog pages circulated for the
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 on-line  shoppers and the Company's  commitment to grow its  e-commerce.  The
Company's

                                       10

<PAGE>
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation


Revenues (continued)

e-commerce Website at sharperimage.com regularly undergoes design and technology
enhancement to provide shoppers with easy and fun shopping experiences. Although
the Company was in the  forefront  of  electronic  shopping  and  activated  its
Website in late  fiscal  1995,  Internet  sales in 1996 were  minimal due to the
newness of the e-commerce industry. Internet sales increased 94% to $1.6 million
in  fiscal  1997,   primarily  due  to  Internet   industry  growth,   continual
improvements to the Website, and increased marketing emphasis.

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

         Net sales of  $215,193,000  for fiscal 1997  increased  $7,423,000,  or
3.6%,  from fiscal 1996.  Returns and  allowances  as a percentage of sales were
12.2% for fiscal  1997,  compared  to 12.3% for  fiscal  1996.  Net store  sales
increased  $2,268,000,  or 1.5%,  comparable  store sales  increased  1.1%,  net
catalog sales increased  $5,195,000,  or 9.7%, and net wholesale sales decreased
$830,000, or 20.6% as compared to fiscal 1996.

         The  increase  in  net  store  sales  for  fiscal  1997  was  primarily
attributable  to the addition of six stores opened during the year. The increase
in net store  sales  also  reflected  a 7.2%  increase  in average  revenue  per
transaction,  to $104 from $97, and a 4.6% decrease in total store transactions.
Strong comparable store sales increases of 7.3% and 3.4% in the third and fourth
quarters of fiscal 1997 more than offset the comparable store sales decreases in
the first  half of the  year.  Management  believes  the  increase  in net sales
benefited from new product  introductions,  including an increased  selection of
Sharper  Image Design  proprietary  products and more optimal  inventory  levels
during the second half of the year.

         Net  catalog  sales in  fiscal  1997  were  positively  impacted  by an
increase in Sharper Image catalog  average  revenue per order to $183 from $140,
advertising  campaigns  in major  consumer  magazines  and  newspapers,  a 10.0%
increase  in the  number of Sharper  Image  catalogs  circulated,  and a twofold
increase in the number of catalogs circulated for the test concept Sharper Image
Home  Collection.  The  Company  believes  that the  increase  in the  number of
catalogs and catalog  pages  circulated  for the Sharper  Image  catalog  during
fiscal 1997 also  contributed to the increases in net store sales and comparable
store sales.

         Net wholesale sales decreased  $830,000,  or 20.6%,  primarily due to a
decrease in the number of products  offered to wholesale  customers  both in the
U.S. and internationally.

         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  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 the sales of Sharper
Image Design proprietary  products to 18% of total revenue from 8% for the prior
fiscal year. These propriety products generally carry higher margins.

         Cost of products  increased  $6,736,000,  or 6.2% , in fiscal 1997 from
fiscal 1996.  The increase was  primarily  related to increases in net sales and
the higher cost of products  related to the  merchandise  mix.  The gross margin
rate for fiscal  1997 was 46.3%,  compared to 47.6% for fiscal  1996.  The lower
gross margin rate reflected an increase in sales of lower-margin products,  such
as certain  state-of-the-art  electronic items and games, partially offset by an
increase in the Sharper Image Design proprietary products.

         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.  It is impossible to predict future
gross margin rates  although the  Company's  goal is to continue to increase the
sales of Sharper Image Design  proprietary  products and other exclusive private
label products, as these products generally carry higher margins. The popularity
of these proprietary  products  contributed to the 2.7 percentage point increase
in the gross margin rate for fiscal 1998, and should continue to have a positive
impact on the Company's gross margin rate.

                                       11
<PAGE>


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


Buying and Occupancy

         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  expenses  decreased  $63,000,  or 0.3%, in fiscal
1997 from fiscal 1996. The decrease  primarily  reflected lower buying costs and
lower occupancy costs associated with the closure of the SPA Collection division
and the  elimination of the cost of two closed  Sharper Image stores,  partially
offset by a full year of occupancy cost of eight new stores opened during fiscal
1996 and the cost of six new stores opened in fiscal 1997.

Advertising and Promotion

         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.  The test mailings of the Home Collection  catalog were discontinued in
fiscal  1998.  The Company is  currently  evaluating  a test of Home  Collection
products on the Internet.

         Advertising   and   promotion   expenses  for  fiscal  1997   decreased
$2,941,000,  or 11.4%, from fiscal 1996. The decrease was primarily due to lower
consumer  magazine and  newspaper  advertising  and the  elimination  of the SPA
Collection catalog,  partially offset by a 10% increase in the number of Sharper
Image catalogs mailed and a 3% increase in the number of pages circulated, along
with the twofold  increase in mailings of the test  concept  Sharper  Image Home
Collection catalog.

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

         The Company plans to expand advertising for its e-commerce  business as
well as infomercials.  The popularity and higher margins of Sharper Image Design
proprietary  products provide  additional  opportunities for the Company to fuel
growth with these additional advertising media.

General, Selling, and Administrative

         General, selling, and administrative (G S & A) 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.

         G S & A expenses for fiscal 1997 increased  $2,403,000,  or 4.7%,  from
fiscal 1996,  primarily due to increases in overall selling  expenses related to
the increase in net sales and higher net delivery  expense related to mail-order
shipments  and  certain  additional  administrative  support  costs,  which were
partially  offset by the  elimination of costs related to the closure of the SPA
division.

Other Income (Expense)

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

         Net other expense for fiscal 1997 increased  $206,000 from fiscal 1996.
The  increase  in other  expense is  primarily  due to an  increase  in interest
expense related to borrowings on the Company's credit  facility,  and a decrease
in interest income from available cash.

Income Taxes

         The  effective  tax rate for  fiscal  1998,  1997,  and 1996 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

         At  January  31,  1999,  the  Company  had  cash  and   equivalents  of
$8,389,000,  an increase of $4,888,000, as compared to $3,501,000 at January 31,
1998. During fiscal 1998, the Company met its short-term liquidity needs and its
capital  requirements  with  available  cash,  cash flow provided by operations,
trade credit,

                                       12

<PAGE>


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


Liquidity and Capital Resources (continued)

and the  revolving  and term loans.  The increase in cash  reflected the highest
fourth quarter  revenues and earnings in the Company's  history.  At January 31,
1999,  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 1998 was $14,288,000, compared with $14,672,000 in
fiscal 1997.  Letter of credit  commitments  outstanding at January 31, 1999 and
1998 were $4,108,000 and $2,321,000, respectively.

         The  Company  has a  revolving  secured  credit  facility  with The CIT
Group/Business  Credit,  Inc, which expires  September 2003. The credit facility
has been amended on several occasions and, as of January 31, 1999, the agreement
allows  Company  borrowings and letters of credit up to a maximum of $30 million
for the period from  October 1, 1999 through  December  31, 1999,  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
based on 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,  1999,  the  Company  was in
compliance  with  all  covenants.   The  credit  facility  allows  for  seasonal
borrowings as follows:

         October 1 through December 31,

         1999        $30 million             2001        $32 million
         2000        $31 million             2002        $33 million

         In addition,  the credit  facility  provides for term loans for capital
expenditures  (Term Loans) up to an aggregate of $4.5 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 based on financial performance.  Each
Term Loan is to be repaid in 36 equal monthly principal installments. At January
31, 1999,  notes payable included a $500,000 Term Loan which bears interest at a
variable rate of prime plus 0.50%,  provides for monthly  principal  payments of
$55,555 plus the related interest payment, and matures in October 1999.

         At January 31, 1999, notes payable included a $2,648,000  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,  1999  was
approximately  5.6% lower than the prior fiscal year.  The decrease in inventory
reflected the Company's higher than planned increase of 15.4% in total net sales
for the quarter  ended  January 31,  1999 as compared  with the same  quarter in
1998.

         The Company leases all of its offices,  stores,  and seasonal warehouse
space.  During the fiscal year ended January 31, 1999,  the Company  opened four
Sharper Image stores located in Orlando, Florida; King of Prussia, Pennsylvania;
West Nyack, New York; and Towson, Maryland. The Company closed two Sharper Image
stores located in Escondido, California and Gurnee Mills, Illinois.

         The Company is currently planning to open five new Sharper Image stores
during fiscal 1999.  Total capital  expenditures  estimated for new and existing
stores,  corporate  headquarters and the distribution center for fiscal 1999 are
between $7 million and $8 million.  The Company believes it will be able to fund
its cash needs for fiscal 1999 through internally  generated cash, trade credit,
and the credit facility.

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,  1999,  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

                                       13

<PAGE>


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


Quantitative and Qualitative Disclosure About Market Risk (continued)


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  Christmas  season.  The  secondary  peak  period  for the  Company is June,
reflecting the gifting 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.

Year 2000 Compliance

         The Company recognizes that the arrival of the year 2000 poses a unique
worldwide  challenge to the ability of many systems to recognize the date change
from December 31, 1999 to January 1, 2000. The year 2000 issue could result,  at
the  Company  and  elsewhere,  in system  failures  or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions or to engage in other normal business  activities.  The
Company has assessed its computer and business  processes  and is  reprogramming
its  computer  applications  to provide for their  continued  functionality.  An
assessment  of the  readiness  of the external  entities  with which the Company
interfaces is ongoing.

         In 1996, the Company developed a detailed year 2000 Conversion  Project
Plan (Plan) to address the methods to correct possible disruptions of operations
due to the year  2000  issue.  The Plan took into  consideration  the  following
items: (i)  identification and inventorying of hardware,  application  software,
and equipment  utilizing  programmable  logic chips to control  aspects of their
operation,  with potential year 2000 problems;  (ii) assessment of scope of year
2000 issues for, and assigning  priorities to, each item based on its importance
to the Company's operations; (iii) remediation of year 2000 issues in accordance
with assigned  priorities,  by correction,  upgrade,  replacement or retirement;
(iv) testing for and validation of year 2000 compliance;  and, (v) determination
of key vendors and customers and their year 2000 compliance. Because the Company
uses a variety  of  information  technology  systems,  internally-developed  and
third-party provided software and embedded chip equipment, depending on business
function and location, various aspects of the Company's year 2000 efforts are in
different phases and are proceeding in parallel. At this time, the difficult and
time consuming task of identifying  and  inventorying  hardware and  application
software with year 2000 issues and developing specific strategies for compliance
has been  completed.  The assessment  process of internal  operating  systems is
complete,  with  critical  applications  being  determined,   planned  for,  and
outlined.  The Company's main  operating  system and hardware have been upgraded
for  year  2000  compliance,   with  all  application  conversion  work  nearing
completion.  Non-critical  system conversions have been identified and scheduled
for completion by June 1999.  This conversion  process  encompasses all areas of
operations of the Company,  from verification of the year 2000 compliance of the
software accounting  packages,  to e-mail systems,  to telephone systems.  Based
upon a  detailed  review  and  update of the Plan  performed  in  January  1999,
conversion  of all  Company  programs  is  expected  to be  completed  with full
implementation by June 1999. In addition, a systemwide test will be completed by
September  1999 to  simulate  the  rollover  to January  1, 2000,  to ensure all
critical systems supporting the business will remain operational.

         The Company's  operations are also dependent on the year 2000 readiness
of third parties that do business with the Company. In particular, the Company's
information  technology systems interact with commercial electronic  transaction
processing  systems to handle  customer credit card purchases and other point of
sale transactions, and the Company is dependent on third-party suppliers of such
infrastructure  elements as  telephone  services,  electric  power,  water,  and
banking facilities. The Company does not depend to any significant degree on any
single  merchandise  vendor  or  upon  electronic  transaction  processing  with
individual vendors for merchandise purchases.  The Plan includes identifying and
initiating formal  communications  with key third parties and suppliers and with
significant  merchandise  vendors to  determine  the extent to which the Company
will be vulnerable to such parties'

                                       14

<PAGE>


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


Year 2000 Compliance (continued)

failure to resolve their own year 2000 issues. Although the Company has not been
put on notice that any known  third  party  problem  will not be  resolved,  the
Company has limited  information  and no  assurance  of  additional  information
concerning the year 2000 readiness of third parties.  The resulting risks to the
Company's business are very difficult to assess.

         Through  January  31,  1999  the  Company  has  incurred  approximately
$300,000 on work related to year 2000  compliance.  The estimated  cost for this
project is between $400,000 and $600,000,  and is being funded through operating
cash flows.  The total estimated cost for this project  includes a provision for
the potential  costs  associated  with third party vendor or supplier  failures.
Operating costs related to year 2000  compliance  projects will be incurred over
several quarters and will be expensed as incurred.

         Based upon the planning and conversions  completed to date, the Company
believes  that,  with  modifications  to existing  software,  conversions to new
software, and appropriate remediation of embedded chip equipment,  the year 2000
issue is not reasonably likely to pose significant  operational problems for the
Company's  information  technology  systems and  embedded  chip  equipment as so
modified and converted.

         The  Company  is  presently  unable to assess the  likelihood  that the
Company  will  experience  operational  problems  due to  unresolved  year  2000
problems of third  parties that do business  with the  Company.  There can be no
assurance that other entities will achieve timely year 2000 compliance;  if they
do not,  year 2000  problems  could  have a  material  impact  on the  Company's
operations.  Where  commercially  reasonable  to do so, the  Company  intends to
assess  its risks  with  respect  to  failure  by third  parties to be year 2000
compliant  and to seek to  mitigate  those  risks.  If  such  mitigation  is not
achievable,  year 2000  problems  could have a material  impact on the Company's
operations.

         The Company's  estimates of the costs of achieving year 2000 compliance
and the date by  which  year  2000  compliance  will be  achieved  are  based on
management's best estimates, which were derived using numerous assumptions about
future events including the continued  availability of certain resources,  third
party modification plans and other factors.  However,  there can be no assurance
that  these  estimates  will  be  achieved,  and  actual  results  could  differ
materially from these estimates. Specific factors that might cause such material
differences  include,  but are not  limited  to,  the  availability  and cost of
personnel  trained  in year 2000  remediation  work,  the  ability to locate and
correct all computer codes, the success  achieved by the Company's  suppliers in
reaching year 2000 readiness,  the timely availability of necessary  replacement
items and similar uncertainties.

         The  Company  presently   believes  that  the  most  reasonably  likely
worst-case  scenarios  that the Company might confront with respect to year 2000
issues have to do with third parties not being year 2000 compliant.  The Company
is  presently  evaluating  vendor  and  customer  compliance  and  will  develop
contingency  plans, such as alternative  vendor  opportunities,  after obtaining
compliance evaluations.  The Company timeline is to develop contingency plans by
September 1999.

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, which speak only as of the date thereof. The Company
undertakes  no   obligations   to  publicly   release  any  revisions  to  these
forward-looking  statements or reflect  events or  circumstances  after the date
hereof.

                                       15

<PAGE>


<TABLE>
Statements of Operations
------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation

<CAPTION>
                                                                      Fiscal Year Ended January 31,
                                                             -----------------------------------------------------
                                                                1999                  1998                1997
Dollars in thousands except per share amounts               (Fiscal 1998)        (Fiscal 1997)        (Fiscal 1996)
------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                  <C>                  <C>        
Revenues:
         Sales                                               $   272,721          $   245,095          $   236,844
         Less: returns and allowances                             31,214               29,902               29,074
                                                             -----------          -----------          -----------
         Net Sales                                               241,507              215,193              207,770
         List rental                                               1,088                  982                1,177
         Licensing                                                   519                  640                1,298
                                                             -----------          -----------          -----------
                                                                 243,114              216,815              210,245
                                                             -----------          -----------          -----------
Costs and Expenses:
         Cost of products                                        123,131              115,535              108,799
         Buying and occupancy                                     26,153               23,904               23,967
         Advertising and promotion                                27,396               22,795               25,736
         General, selling, and administrative                     59,006               53,074               50,671
         Provision for loss due to closure of SPA
                  Collection division                               --                   --                  8,000
                                                             -----------          -----------          -----------
                                                                 235,686              215,308              217,173
                                                             -----------          -----------          -----------
Other Income (Expense):
         Interest expense--net                                      (645)                (564)                (391)
         Other--net                                                  887                   45                   78
                                                             -----------          -----------          -----------
                                                                     242                 (519)                (313)
                                                             -----------          -----------          -----------
Earnings (Loss) before Income Tax (Benefit)                        7,670                  988               (7,241)
Income Tax (Benefit)                                               3,068                  395               (2,896)
                                                             -----------          -----------          -----------
Net Earnings (Loss)                                          $     4,602          $       593          $    (4,345)
                                                             -----------          -----------          -----------
Net Earnings (Loss) Per Share - Basic                        $      0.54          $      0.07          $     (0.53)
                                                             -----------          -----------          -----------
Net Earnings (Loss) Per Share - Diluted                      $      0.51          $      0.07          $     (0.53)
                                                             -----------          -----------          -----------
Weighted Average Number of Shares - Basic                      8,532,588            8,303,425            8,260,208
                                                             -----------          -----------          -----------
Weighted Average Number of Shares - Diluted                    9,072,832            8,537,032            8,260,208
                                                             -----------          -----------          -----------

<FN>
                                         See Notes to Financial Statements.
</FN>
</TABLE>

                                                                 16

<PAGE>


<TABLE>
Balance Sheets
--------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation

<CAPTION>
                                                                                           Fiscal Year Ended January 31,
                                                                                           ------------------------------
                                                                                                1999            1998
Dollars in thousands except per share amounts                                               (Fiscal 1998)   (Fiscal 1997)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>             <C>    
Assets
Current Assets:
         Cash and equivalents                                                                  $ 8,389         $ 3,501
         Accounts receivable, net of allowance for doubtful accounts of $804 and $508            6,787           8,189
         Merchandise inventories                                                                32,598          34,534
         Deferred catalog costs                                                                  2,454           4,982
         Prepaid expenses and other                                                              5,605           3,429
                                                                                               -------         -------
Total Current Assets                                                                            55,833          54,635
Property and Equipment, Net                                                                     22,513          20,842
Deferred Taxes and Other Assets                                                                  3,699           3,185
                                                                                               -------         -------
         Total Assets                                                                          $82,045         $78,662
                                                                                               -------         -------

Liabilities and Stockholders' Equity
Current Liabilities:
         Accounts payable                                                                      $11,653         $18,439
         Accrued expenses                                                                       16,960          16,832
         Deferred revenue                                                                        7,268           6,784
         Income taxes payable                                                                    3,314            --
         Current portion of notes payable                                                          635             947
                                                                                               -------         -------
Total Current Liabilities                                                                       39,830          43,002
Notes Payable                                                                                    2,513           3,299
Other Liabilities                                                                                3,053           3,205
Commitments and Contingencies                                                                     --              --
                                                                                               -------         -------
Total Liabilities                                                                               45,396          49,506
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,
                  8,916,995 and 8,356,280 shares                                                    89              83
         Additional paid-in capital                                                             12,589           9,704
         Retained earnings                                                                      23,971          19,369
Total Stockholders' Equity                                                                      36,649          29,156
                                                                                               -------         -------
         Total Liabilities and  Stockholders' Equity                                           $82,045         $78,662
                                                                                               -------         -------

<FN>
                                           See Notes to Financial Statements.
</FN>
</TABLE>

                                                                 17

<PAGE>


<TABLE>
Statements of Stockholders' Equity
------------------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation

<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, 1996                           8,250,980       $       82       $    9,555       $   23,121       $   32,758
Issuance of common stock
         for stock options exercised,
         (net of income tax benefit)                     15,960                1               35                                36
Net loss                                                                                                    (4,345)          (4,345)
                                                     ----------       ----------       ----------       ----------       ----------
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
                                                     ----------       ----------       ----------       ----------       ----------

<FN>
                                                 See Notes to Financial Statements
</FN>
</TABLE>

                                                                 18

<PAGE>


<TABLE>
Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation

<CAPTION>
                                                                                                Fiscal Year Ended January 31,
                                                                                         -------------------------------------------
                                                                                              1999          1998            1997
Dollars in thousands                                                                     (Fiscal 1998)  (Fiscal 1997)  (Fiscal 1996)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>            <C>      
Cash was Provided by (Used for) Operating Activities:
         Net earnings (loss)                                                                $  4,602       $    593       $ (4,345)
         Adjustments to reconcile net earnings (loss) to net cash
                  provided by (used for) operating activities:
                  Depreciation and amortization                                                5,027          4,334          4,195
                  Deferred rent expense                                                           78            151            142
                  Deferred income taxes                                                       (1,459)         1,614         (3,188)
                  Gain on sale of equipment                                                     (840)          --             --
         Change in operating assets and liabilities:
                  Accounts receivable                                                          1,402         (2,274)        (1,479)
                  Merchandise inventories                                                      1,936         (7,169)        (3,052)
                  Deferred catalog costs, prepaid expenses and other                           1,298         (1,571)            54
                  Accounts payable and accrued expenses                                       (5,822)           838         11,429
                  Deferred revenue and other liabilities                                       3,568          1,308           (508)
                                                                                            --------       --------       --------
Cash Provided by (Used for) Operating Activities                                               9,790         (2,176)         3,248
                                                                                            --------       --------       --------
Cash was Provided by (Used for) Investing Activities:
         Property and equipment expenditures                                                  (8,431)        (4,437)        (6,579)
         Proceeds from sale of equipment                                                       1,736             53             98
                                                                                            --------       --------       --------
Cash Used for Investing Activities                                                            (6,695)        (4,384)        (6,481)
                                                                                            --------       --------       --------
Cash was Provided by (Used for) Financing Activities:
         Issuance of common stock for warrants and stock
              options exercised, (net of stock repurchases)                                    2,891            114             36
         Proceeds from notes payable and revolving credit facility                            46,921         27,761         25,665
         Principal payments on notes payable and revolving credit facility                   (48,019)       (28,687)       (24,071)
                                                                                            --------       --------       --------
Cash Provided by (Used for) Financing Activities                                               1,793           (812)         1,630
                                                                                            --------       --------       --------

Net Increase (Decrease) in Cash and Equivalents                                                4,888         (7,372)        (1,603)
Cash and Equivalents at Beginning of Period                                                    3,501         10,873         12,476
                                                                                            --------       --------       --------
Cash and Equivalents at End of Period                                                       $  8,389       $  3,501       $ 10,873
                                                                                            --------       --------       --------


Supplemental Disclosure of Cash Paid for:
         Interest                                                                           $    813       $    771       $    700
         Income Taxes                                                                       $   --         $    409       $    459

<FN>
                                                 See Notes to Financial Statements.
</FN>
</TABLE>

                                                                 19

<PAGE>


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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note A -- Summary of Significant Accounting Policies

The Company is a leading specialty  retailer which 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:  Catalog sales are recorded when merchandise is shipped and
the Company  provides for 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 $4,470,000,  $3,580,000,  and $5,306,000, for the fiscal years ended
January 31, 1999, 1998, and 1997.

Start-Up  Activities:  All start-up and preopening  costs that are not otherwise
capitalizable as long-lived assets are expensed as incurred by the Company.

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 ten years for office  furniture and
equipment and transportation 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 7 to 18 years.

The Company  manufactures  its own  proprietary  products  for sale  through its
stores and catalogs.  Costs  incurred for tooling,  dies and package  design are
deferred and  amortized  over the  estimated  life of these  products,  which is
generally two years. At January 31, 1999 and 1998, capitalized costs included in
property  and  equipment,  net of  related  amortization,  were  $2,239,000  and
$1,566,000, 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, 1999, 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  stock-based  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
8,532,588,  and 8,303,425, and 8,260,208, for the fiscal years ended January 31,
1999, 1998, and 1997. 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 540,244 and 233,607
incremental  shares  assumed  issued on the  exercise of common stock during the
fiscal years ended  January 31, 1999 and 1998.  Stock options were excluded from
the  computation  of diluted loss per share for the year ended January 31, 1997,
as the effect would be anti-dilutive.

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 $6.66 and $3.56 for the fiscal years
ended January 31, 1999 and 1998, was 14,000 and 97,500.

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 (loss) for the
Company for the years ended January 31, 1999, 1998, and 1997.

New Accounting Standards: In June 1998, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that an
entity  recognize  all  derivatives  as  either  assets  or  liabilities  in the
statement of financial  position and measure  these  instruments  at fair value.
This statement is effective for years  beginning  after June 15, 1999 and is not
applied  retroactively  to financial  statements for prior periods.  The Company
believes that this  statement  will not have a material  effect on its financial
statements.

Reclassification:  Certain  reclassifications  have  been  made to prior  years'
financial statements in order to conform with the classifications of the January
31, 1999 financial statements.

                                       20

<PAGE>



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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note B -- Property and Equipment

Property and equipment is summarized as follows:

                                                   Fiscal Year Ended January 31,
                                                   -----------------------------
                                                       1999             1998
Dollars in thousands                              (Fiscal 1998)    (Fiscal 1997)
--------------------------------------------------------------------------------
Leasehold improvements                                $25,419         $24,071
Office furniture and equipment                         35,466          30,313
Transportation                                             16           2,439
Land                                                       53              53
Building                                                2,874           2,874
                                                      -------         -------
                                                       63,828          59,750
Less accumulated depreciation
         and amortization                              41,315          38,908
                                                      -------         -------
                                                      $22,513         $20,842
                                                      -------         -------

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,  1999  and  1998  was  $766,000   and   $590,000,
respectively.

Note D -- Revolving Loan and Notes Payable

The Company has a revolving secured credit facility with The CIT  Group/Business
Credit, Inc., which expires September 2003. The credit facility has been amended
on several  occasions and, as of January 31, 1999, the agreement  allows Company
borrowings  and  letters of credit up to a maximum of $30 million for the period
from October 1, 1999 through  December 31, 1999, 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 prime plus
0.25% per annum or at LIBOR plus 2.25% per annum based on 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, 1999 and 1998, the Company was in compliance with all covenants.

The credit facility allows for seasonal borrowings as follows:

October 1 through December  31,

2000                                                                 $31 million
2001                                                                 $32 million
2002                                                                 $33 million

At January 31, 1999 and 1998,  the  Company  had no amounts  outstanding  on its
revolving loan credit facility.  Letter of credit  commitments as of January 31,
1999 and 1998 were $4,108,000 and $2,321,000, respectively.

In  addition,   the  credit  facility   provides  for  term  loans  for  capital
expenditures  (Term Loans) up to an aggregate of $4.5 million.  Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
(8.25% at January  31,1999)  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.  Notes payable included a Term Loan which bears interest
at a variable rate of prime plus 0.50%, (8.25% at January 31, 1999) provides for
monthly  principal  payments of $55,555 plus the related interest  payment,  and
matures in October 1999.  At January 31, 1999 and 1998,  the balance of the Term
Loan was $500,000 and $1,167,000, respectively.

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, 1999 and 1998,  the balance of this note
was $2,648,000 and $2,772,000, respectively.

At January 31, 1998, notes payable also included a mortgage loan  collateralized
by equipment.  This note was paid off in fiscal 1998 with the proceeds from sale
of the collateralized equipment.

Future minimum  principal  payments on notes payable at January 31, 1999, are as
follows:

Dollars in thousands
--------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2000                                                                     $   635
2001                                                                         147
2002                                                                         160
2003                                                                         173
2004                                                                         189
Later years                                                                1,844
                                                                          ------
Total notes payable                                                       $3,148
                                                                          ------

                                       21

<PAGE>


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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note E -- Income Taxes

                                            Fiscal Year Ended January 31,
                                  ----------------------------------------------
                                        1999             1998            1997
Dollars in thousands              (Fiscal 1998)    (Fiscal 1997)   (Fiscal 1996)
--------------------------------------------------------------------------------
Currently payable (refundable):
         Federal                      $ 3,848         $(1,036)        $   248
         State                            679            (183)             44
                                      -------         -------         -------
                                        4,527          (1,219)            292
Deferred:
         Federal                       (1,240)          1,372          (2,710)
         State                           (219)            242            (478)
                                      -------         -------         -------
                                       (1,459)          1,614          (3,188)
                                      -------         -------         -------
                                      $ 3,068         $   395         $(2,896)
                                      -------         -------         -------


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,
                                      ------------------------------------------
                                           1999          1998          1997
                                      (Fiscal 1998) (Fiscal 1997)  (Fiscal 1996)
--------------------------------------------------------------------------------
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:

                                                   Fiscal Year Ended January 31,
                                                  ------------------------------
                                                      1999              1998
Dollars in thousands                             (Fiscal 1998)     (Fiscal 1997)
--------------------------------------------------------------------------------
Current:
         Nondeductible reserves                     $ 4,123           $ 3,809
         Deferred catalog costs                        (981)           (1,993)
         State taxes                                   (755)             (569)
                                                    -------           -------
Current--net                                          2,387             1,247
                                                    -------           -------
Noncurrent:
         Deferred rent                                1,198             1,429
         Depreciation                                 2,967             2,356
         Deductible software costs                   (1,127)           (1,050)
         Other--net                                    (173)             (189)
                                                    -------           -------
Noncurrent--net                                       2,865             2,546
                                                    -------           -------
Total                                               $ 5,252           $ 3,793
                                                    -------           -------


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, 1999, are as follows:

Dollars in thousands
--------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2000                                                                    $ 14,875
2001                                                                      13,392
2002                                                                       9,625
2003                                                                       9,411
2004                                                                       8,891
Later years                                                               19,535
                                                                        --------
Total minimum lease commitments                                         $ 75,729
                                                                        --------


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,
                               -------------------------------------------------
                                    1999              1998              1997
Dollars in thousands           (Fiscal 1998)     (Fiscal 1997)     (Fiscal 1996)
--------------------------------------------------------------------------------
Minimum rentals                   $15,273           $13,812           $13,259
Percentage rentals
and other charges                   5,914             5,559             5,546
                                  -------           -------           -------
                                  $21,187           $19,371           $18,805
                                  -------           -------           -------

                                       22

<PAGE>


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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note G -- Stockholders' Equity

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, 1999,  the Company has  repurchased a total of 186,100  shares at an
average  price of $5.95 per share,  including  35,000  shares in fiscal 1997 for
$124,000.

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 2,405,000 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.  Non-employee  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
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 50,000
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, 1999, the Company had reserved  403,500 shares and 19,000 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,
five years from date of grant;  stock  volatility,  51% in both  fiscal 1998 and
1997, and 45% in fiscal 1996;  risk-free  interest rates,  5.12% in fiscal 1998,
6.10% in fiscal  1997,  and 6.21% in fiscal 1996;  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 1998,  fiscal 1997, fiscal 1996 and fiscal 1995 awards had been amortized
to expense over the vesting period of the awards,  pro forma net earnings (loss)
would have been $4,338,715  ($0.51 earnings per share - basic and $0.48 earnings
per share  -diluted) in fiscal 1998,  $383,000 ($0.05 earnings per share - basic
and $0.04 earnings per share - diluted) in fiscal 1997, and $(4,576,000)  ($0.55
loss per share - basic and  diluted)  in fiscal  1996.  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 1998, fiscal
1997, and fiscal 1996 pro forma  adjustments are not  necessarily  indicative of
future  period pro forma  adjustments,  when the  calculation  will apply to all
future applicable stock options.

                                       23

<PAGE>


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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note G -- Stockholders' Equity (continued)

<TABLE>
The following table reflects the activity under these plans:

<CAPTION>
                                                                                                  Weighted
                                                                          Number of               Average
                                                                           Options             Exercise Price
                                                                        -------------------------------------
<S>                                                                       <C>                    <C>     
Balance at January 31, 1996                                               1,178,270              $   4.03
Granted (weighted average fair value of $1.70)                              951,800                  3.54
Exercised                                                                   (15,960)                 4.39
Cancelled                                                                  (609,610)                 5.58
                                                                          ---------
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

Exercisable at January 31, 1997                                             624,000              $   2.49
                                                                          ---------
Exercisable at January 31, 1998                                             591,000              $   2.73
                                                                          ---------
Exercisable at January 31, 1999                                             379,000              $   3.58
                                                                          ---------
</TABLE>


<TABLE>
<CAPTION>
                              Options Outstanding                                      Options Exercisable
------------------------------------------------------------------------------   -------------------------------
                             Number      Weighted Average     Weighted Average     Number            Weighted
        Range of          of Options    Remaining Contractual     Exercise       of Options          Average
    Exercise Prices      Outstanding         Life (years)          Price         Exercisable      Exercise Price
------------------------------------------------------------------------------   -------------------------------
<S>                       <C>                    <C>               <C>             <C>                <C>
     $1.16 - $1.99            9,995              2.9               $1.88            10,000            $1.88
      2.00 -  3.99          976,470              8.5                3.58           326,000             3.40
      4.00 -  7.94          158,640              8.9                4.99            43,000             5.33
                          ---------                                                -------
     $1.16 - $7.94        1,145,105              8.5               $3.76           379,000            $3.58
                          ---------                                                -------
</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 $73,000,
$77,000,  and $81,000 for the fiscal  years ended  January 31, 1999,  1998,  and
1997, respectively.

Note I -- Provision for Loss Due to Closure of SPA Collection Division

The Company  critically  evaluates  the results and  long-term  potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of this process, in January 1997 the
Company decided to close the unprofitable SPA Collection division.

During the fourth quarter of fiscal 1996, the Company incurred a one-time charge
related to the closure of the SPA Collection division of $8,000,000  ($4,800,000
net of the tax  benefit,  or 56  cents  loss per  share).  The  one-time  charge
primarily  related  to the  lease  commitments  and the net book  value of fixed
assets related to the SPA  Collection  division.  The liability  related to this
one-time  charge at January 31,  1999,  and January 31,  1998,  in the amount of
$200,000 and $3,822,000, respectively, was included in accrued expenses.

Note J -- 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 and results
of operations.

                                       24

<PAGE>


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

Fiscal Years Ended January 31, 1999, 1998, and 1997

Note K -- Segment Information

The Company  classifies its business  interests  into two  reportable  segments:
retail stores and catalog.  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.

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

<CAPTION>
                                                                      Fiscal Year  Ended January 31,
                                                      -------------------------------------------------------------
                                                           1999                    1998                    1997
Dollars in thousands                                  (Fiscal 1998)           (Fiscal 1997)           (Fiscal 1996)
-------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                     <C>      
Revenues
Stores                                                  $ 162,371               $ 151,589               $ 149,321
Catalog                                                    70,750                  58,772                  53,577
Other                                                       9,993                   6,454                   7,347
                                                        ---------               ---------               ---------
Total Revenues                                          $ 243,114               $ 216,815               $ 210,245
                                                        ---------               ---------               ---------
Operating Contributions
Stores                                                  $  19,405               $  15,170               $   7,634
Catalog                                                     8,814                   3,059                   7,411
Unallocated                                               (20,549)                (17,241)                (22,286)
                                                        ---------               ---------               ---------
Earnings (Loss) Before Income Tax (Benefit)             $   7,670               $     988               $  (7,241)
                                                        ---------               ---------               ---------
Depreciation and Amortization
Stores                                                  $   2,812               $   2,516               $   2,692
Catalog                                                      --                      --                      --
Unallocated                                                 2,215                   1,818                   1,503
                                                        ---------               ---------               ---------
Total Depreciation and Amortization                     $   5,027               $   4,334               $   4,195
                                                        ---------               ---------               ---------
Asset Expenditures
Stores                                                  $   5,988               $   2,722               $   4,104
Catalog                                                      --                      --                      --
Unallocated                                                 2,443                   1,715                   2,475
                                                        ---------               ---------               ---------
Total Asset Expenditures                                $   8,431               $   4,437               $   6,579
                                                        ---------               ---------               ---------
Assets
Stores                                                  $  13,673               $  11,564               $  14,434
Catalog                                                      --                      --                      --
Unallocated                                                68,372                  67,098                  64,370
                                                        ---------               ---------               ---------
Total Assets                                            $  82,045               $  78,662               $  78,804
                                                        ---------               ---------               ---------
</TABLE>

                                                                 25

<PAGE>


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

Fiscal Years Ended January 31, 1999 and 1998

<TABLE>
Note L -- Quarterly Financial Information (Unaudited)

<CAPTION>
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
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C>                 <C>      
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



Dollars in thousands except per share amounts                                       Three Months Ended
                                                              ----------------------------------------------------------------------
                                                              April 30,           July 31,           October 31,         January 31,
Fiscal Year Ended January 31, 1999                              1997                1997                1997                 1998
-----------------------------------------------------------------------------------------------------------------------------------

Revenues                                                      $  36,273           $  43,340           $  41,106           $  96,096
Expenses
         Cost of products                                        19,563              23,472              22,115              50,385
         Buying and occupancy                                     5,707               5,783               5,946               6,468
         Advertising and promotion                                3,546               4,715               4,036              10,498
         General, selling and administrative                     11,021              11,739              11,429              18,885
Other income (expense)                                              (45)               (118)               (198)               (158)
Earnings (loss) before income tax (benefit)                      (3,609)             (2,487)             (2,618)              9,702
Income tax (benefit)                                             (1,443)               (995)             (1,047)              3,880
Net earnings (loss)                                           $  (2,166)          $  (1,492)          $  (1,571)          $   5,822
Net earnings (loss) per share - Basic(1)                      $   (0.26)          $   (0.18)          $   (0.19)          $    0.70
                                Diluted(2)                    $   (0.26)          $   (0.18)          $   (0.19)          $    0.67

<FN>
(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.
</FN>
</TABLE>

                                       26

<PAGE>


Corporate Data
--------------------------------------------------------------------------------
Sharper Image Corporation


Board of Directors
--------------------------------------------------------------------------------
Richard Thalheimer                          Morton David
Founder                                     Retired Chairman, President, and
Chairman of the Board                       Chief Executive Officer
Chief Executive Officer                     Franklin Electronic Publishers, Inc.

Alan Thalheimer                             Gerald Napier
Retired Business Executive                  Retired President of
                                            I. Magnin and Company
Maurice Gregg
Retail Financial Consultant



Officers
--------------------------------------------------------------------------------
Richard Thalheimer                          Joe Williams
Founder                                     Senior Vice President
Chairman of the Board                       Loss Prevention
Chief Executive Officer
                                            Roger Bensinger
Barry Gilbert                               Vice President
Vice Chairman                               Business Development
Chief Operating Officer
                                            Barry Jacobsen
Tracy Wan                                   Vice President
Executive Vice President                    Distribution
Chief Financial Officer
Corporate Secretary                         Ralph Odom
                                            Vice President
Greg Alexander                              Stores
Senior Vice President
Management Information Systems              Mary Tanner
                                            Vice President
Tony Farrell                                Human Resources
Senior Vice President
Creative Services                           Charles Taylor
                                            Vice President
Davia Kimmey                                Sharper Image Design
Senior Vice President
Marketing                                   Robert Thompson
                                            Vice President
Shannon King                                Merchandising
Senior Vice President
Merchandising



Corporate Headquarters
--------------------------------------------------------------------------------
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
FAX: (415) 445-1574                         10-K  (exclusive of exhibits) is
                                            available without charge upon
Transfer Agent and                          written request to:
Registrar                                        Investor Relations
Chase Mellon Shareholder                         The Sharper Image
Services LLC                                     650 Davis Street
85 Challenger Road                               San Francisco, CA 94111
Overbeck Center
Ridgefield Park, NJ 07660                   Annual Meeting
                                            The Annual Meeting of
Corporate Counsel                           Stockholders of Sharper Image
Brobeck, Phleger & Harrison LLP             Corporation  will be held on
One Market                                  Monday,  June 7, 1999,  at 10 am
Spear Street Tower                          at the World Trade Club,
San Francisco, CA 94105                     Ferry  Building,
                                            San Francisco, California.
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 1998        Fiscal Year 1997
                           High        Low         High      Low
First Quarter             11 5/8     4  1/16      4 3/4     3
Second Quarter             8 3/8     4 11/16      4         2  7/8
Third Quarter              5 5/8     2  1/2       3 7/8     2 13/16
Fourth Quarter            25         3  3/4       4 3/8     2  7/8


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,  1999 and  1998,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for each of the three  fiscal  years in the
period ended January 31, 1999. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial position of Sharper Image Corporation as of January 31,
1999 and 1998,  and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1999 in  conformity  with
generally accepted accounting principles.


/s/ Deloitte & Touche LLP                           [Deloitte & Touche LLP Logo]

San Francisco, California
March 26, 1999


                                       27


<PAGE>


                                [graphic omitted]




                        Our stereo CD Radio/Alarm Clock
                      with Sound Soother(R) was created by
                      Sharper Image Design. Introduced in
                      1998, it was an imediate top seller.




                           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.