Exhibit 13.1
<TABLE>
<CAPTION>

Financial Highlights
------------------------------------------------------------------------------------------------------------------------------------
                                                                            Fiscal Year Ended January 31,
                                                 -----------------------------------------------------------------------------------
Operating Results                                      1997                1996             1995            1994              1993

<S>                                               <C>                 <C>               <C>             <C>              <C>       
Revenues                                         $    210,245       $    204,184      $    188,535    $    147,441     $    149,995
Provision for loss on the closure of
         the SPA Collection division                   (8,000)              --                --              --               --
Earnings (loss) before income taxes                    (7,241)               739             6,139           2,939              598
Net earnings (loss)                                    (4,345)               444             3,683           1,763              359
Net earnings (loss) per share                    $      (0.53)      $       0.05      $       0.41    $       0.20     $       0.04

Balance Sheet Data

Working capital                                  $      9,429(1)    $     17,233      $     23,011    $     19,488     $     15,426
Total assets                                           78,804             70,456            64,036          55,095           53,739
Notes payable                                           4,245              3,355               838             987              648
Stockholders' equity                             $     28,449       $     32,758      $     32,792    $     29,868     $     28,025
Current ratio                                            1.22               1.56              1.85            1.94             1.75

Statistics

Number of stores at year end                               88(2)              82(2)             74              73               74
Comparable store sales                                   (2.1%)              3.3%             17.8%           (4.1%)            4.8%
Annualized net sales per selling square foot     $        817       $        850      $        832    $        726     $        796
Number of catalogs mailed                          37,695,000(3)      32,780,000(3)     31,522,000      25,879,000       23,413,000
Number of catalog orders                              470,000            536,000           426,000         252,000          248,000
Average revenue per order:
         Stores                                  $         97       $        106      $        102    $         95     $         89
         Catalog                                 $        138       $        122      $        116    $        120     $        112
Returns on average stockholder's equity                   N/A                1.4%             11.8%            6.1%             1.3%
Book value per share                             $       3.44       $       3.97      $       3.96    $       3.61     $       3.40
Weighted average number of shares outstanding       8,260,208          8,682,078         8,899,289       8,683,929        8,652,178

<FN>

   Dollars are in thousands except Net earnings (loss) per share and Statistics.
(1)Includes  $8,000 of accrued  liabilities  related  to the  closure of the SPA
   Collection division.
(2)Includes  six and four SPA  Collection  stores at January  31, 1997 and 1996,
   respectively.
(3)Includes  2,900,000 of The Sharper Image HOME  Collection(a)  catalogs mailed
   for January 31, 1997. Excludes SPA Collection catalogs mailed for January 31,
   1997 and 1996.
</FN>
</TABLE>

                                GRAPH GOES HERE


<PAGE>

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

Results Of Operations                        Fiscal Year Ended January 31,
                                           1997           1996          1995
Percentage of Total Revenues          (Fiscal 1996) (Fiscal 1995)  (Fiscal 1994)
--------------------------------------------------------------------------------
Revenues:
         Net store sales                   71.0%         71.1%         71.7%
         Net catalog sales                 25.9          26.6          26.2
         Net wholesale sales                1.9           1.5           1.0
         List rental                        0.6           0.5           0.8
         Licensing                          0.6           0.3           0.3
                                           -----         -----         -----
Total Revenues                            100.0         100.0         100.0

Costs and Expenses:
         Cost of products                  51.8          50.3          51.1
         Buying and occupancy              11.4          10.5          10.4
         Advertising and promotion         12.2          15.5          11.3
         General, selling, and 
         administrative                    24.1          23.5          23.8
         Provision for loss due
         to closure of SPA
         Collection division                3.8           --            --
                                           -----         -----         -----
Operating Income (Loss)                    (3.3)          0.2           3.4
Other Income (Expense)                     (0.2)          0.2          (0.1)
                                           -----         -----        -----
Earnings (Loss) Before
  Income Tax (Benefit)                     (3.5)          0.4           3.3
Income Tax (Benefit)                       (1.4)          0.2           1.3
                                           -----         -----         -----
Net Earnings (Loss)                        (2.1%)         0.2%          2.0%
                                           -----         -----         -----
Supplemental Pro Forma Data
<TABLE>

   The following  supplemental  pro forma data is presented to assist the reader
in understanding the impact of the closure of the SPA Collection division.
<CAPTION>
                                                          January 31, 1997                              January 31, 1996
                                               ---------------------------------------     ---------------------------------------
                                              Results excluding    SPA         Total       Results excluding    SPA        Total
Dollars in thousands                             SPA Division    Division      Company        SPA Division    Division     Company
---------------------                          ---------------------------------------     ---------------------------------------
Fiscal year

<S>                                                <C>          <C>           <C>               <C>          <C>           <C>      
Revenues                                           $ 199,120    $  11,125     $ 210,245         $ 195,838    $   8,346     $ 204,184
Provision for loss due to closure of
         SPA Collection division                        --         (8,000)       (8,000)             --           --            --
Earnings (loss) from operations                        4,618      (11,546)       (6,928)            4,110       (3,750)          360
Net earnings (loss)                                $   2,664    $  (7,009)    $  (4,345)        $   2,771    $  (2,327)    $     444

Per share data:

Provision for loss due to closure of
         SPA Collection division, net
         of tax benefit                            $    --      $   (0.56)    $   (0.56)        $    --      $    --       $    --
Net earnings (loss) per share                      $    0.32    $   (0.85)    $   (0.53)        $    0.32    $   (0.27)    $    0.05

Fourth quarter

Revenues                                           $  85,045    $   5,145     $  90,190         $  75,908    $   3,481     $  79,389
Provision for loss due to closure of 
         SPA Collection division                        --         (8,000)       (8,000)             --           --            --
Earnings (loss) from operations                        9,579       (8,528)        1,051             6,905       (1,309)        5,596
Net earnings (loss)                                $   5,732    $  (5,127)    $     605         $   4,166    $    (795)    $   3,371
Per share data:
Provision for loss due to closure of
         SPA Collection division, net
         of tax benefit                            $    --      $   (0.56)    $   (0.56)        $    --      $    --       $    --
Net earnings (loss) per share                      $    0.67    $   (0.60)    $    0.07         $    0.48    $   (0.09)    $    0.39
</TABLE>

                                                       11

<PAGE>

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


Revenues
                                               Fiscal Year Ended
                            ----------------------------------------------------
                                  Jan. 31,           Jan. 31,         Jan. 31,
                                   1997               1996             1995
Dollars in thousands          (Fiscal 1996)       (Fiscal 1995)    (Fiscal 1994)
--------------------------------------------------------------------------------
Net store sales                 $149,321            $ 145,095       $ 135,203
Net catalog sales                 54,420               54,160          49,462
Net wholesale sales                4,029                3,145           1,912
                                 -------              -------         -------
Total Net Sales                  207,770              202,400         186,577
List rental                        1,177                1,102           1,442
Licensing                          1,298                  682             516
                                 -------              -------         -------
Total Revenues                  $210,245             $204,184        $188,535
                                 -------              -------         -------

Net sales of $207,770,000  for fiscal 1996 increased  $5,370,000,  or 2.7%, from
the prior  fiscal year.  Returns and  allowances  as a percentage  of sales were
12.3% for fiscal  1996,  compared  to 12.2% for  fiscal  1995.  Net store  sales
increased  $4,226,000,  or 2.9%,  comparable  store sales  decreased  2.1%,  net
catalog sales  increased  $260,000,  or 0.5%, and net wholesale  sales increased
$884,000, or 28.1%.

During the first nine months of fiscal 1996,  the Company's  sales and operating
results were negatively impacted by key factors ranging from key vendors missing
delivery  dates,  to  out-of-stock  situations with key items, to higher catalog
paper prices.  These factors turned  positive during the fourth quarter with key
new  products  arriving as planned,  increased  inventory  levels and savings on
catalog paper prices.

The increase in net stores sales for fiscal 1996 was primarily  attributable  to
the  addition  of eight new stores  opened  during  the year,  two of which were
Sharper Image SPA stores.  The increase in net store sales also reflected a 9.8%
increase in total store transactions,  partially offset by a decrease in average
revenue per order from $106 to $97.  Net sales per average  selling  square foot
were $817 for fiscal 1996,  compared to $850 in fiscal 1995,  and $832 in fiscal
1994.  Sharper Image  stores' sales  productivity  compares  favorably  with the
retail industry's  specialty store (hard goods) average of $327 for fiscal 1995,
$295 for fiscal 1994, and $253 for fiscal 1993 (statistical information for 1996
is not yet available).  Although  comparable  store sales decreased by 11.5% for
the first nine months of fiscal 1996, the excellent  fourth quarter sales offset
almost all of the decrease. Comparable store sales increased 5.9% for the fourth
quarter,  during which the Company generated  approximately 43% of its revenues.
Management   believes  the  successful  quarter  was  primarily  fueled  by  the
introduction  of several key new products as well as better  inventory  in-stock
position.

Net catalog sales were  positively  impacted by the test mailings of the Sharper
Image HOME  Collection  catalog,  an increase in average  revenue per order from
$122 to $138, and by the changes that were made during the fourth quarter, which
included the new redesigned  Sharper Image catalog and the advertising  campaign
in major consumer  magazines and  newspapers.  This was partially  offset by the
decrease  in net  catalog  sales  related  to the  Sharper  Image  catalog,  due
primarily  to the  decrease  in the number of pages  circulated  for the Sharper
Image catalog.

Wholesale  sales  increased  primarily  due to the  increase  in the  number  of
wholesale customers both in the U.S. and internationally.

Net sales of $202,400,000 for fiscal 1995 increased  $15,823,000,  or 8.5%, from
the prior  fiscal year.  Returns and  allowances  as a percentage  of sales were
12.2% for fiscal  1995,  compared  to 12.3% for  fiscal  1994.  Net store  sales
increased  $9,892,000,  or 7.3%,  comparable  store sales  increased  3.3%,  net
catalog sales  increased  $4,698,000,  or 9.5% and net wholesale sales increased
$1,233,000, or 64.5%.

The increase in net store sales and  comparable  store sales in 1995 reflected a
5.4% increase in total store transactions and an increase in average revenue per
order  from  $102 to  $106.  The  increase  in net  store  sales  was  partially
attributable  to the addition of ten new stores opened during the year,  four of
which  were  Sharper  Image SPA test  stores.  The  Sharper  Image SPA store and
catalog concept was designed to tap into the female consumers market, offering a
product mix with a theme of "look better, feel better, live better."

The increase in net catalog  sales in fiscal 1995  reflected a 4.2%  increase in
total  catalog  orders,  an increase  in average  revenue per order from $116 to
$122, and was primarily  attributable  to the sales related to the test mailings
of the Sharper Image SPA catalogs,  partially offset by a slight decrease in net
catalog sales related to The Sharper Image Catalog.

The Company  believes  that the  increase in the number of catalogs  and catalog
pages  circulated  for the Sharper Image catalog during the first half of fiscal
1995,  as well as the higher demand for the  Company's  merchandise  assortment,
particularly the Company's proprietary and private label products, personal care
products and fitness  equipment,  also  contributed to the increase in net store
sales and comparable store sales.

Wholesale  sales  increased  primarily  due to the  increase  in the  number  of
wholesale customers both in the U.S. and internationally, and to the increase in
the number of Sharper Image brand products offered to these wholesale customers.

The Company  continually  evaluates the  profitability of each store location to
determine whether or not to expand, remodel, relocate, or close stores.

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.

                                       12

<PAGE>

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

Cost of Products

Cost of products increased $6,071,000,  or 5.9% in fiscal 1996 from fiscal 1995.
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
1996 was 47.6%,  compared to 49.1% for fiscal 1995.  The lower gross margin rate
for fiscal  1996 as compared to fiscal  1995 is  partially  attributable  to the
changes in the Company's  merchandise  mix, which reflected an increase in sales
of lower margin products, such as certain state-of-the-art  electronic items and
games and a decrease in sales of certain  higher  margin  products,  such as the
Company's Sharper Image Design propriety products and fitness equipment.

Cost of products increased $6,415,000, or 6.7%, in fiscal 1995 from fiscal 1994.
This increase  primarily  reflected the increase in cost of products  related to
increases  in net  sales.  The gross  margin  rate for  fiscal  1995 was  49.1%,
compared to 48.2 % for fiscal 1994. The higher gross margin rate for fiscal 1995
as  compared to fiscal  1994  primarily  reflected  the  positive  impact of the
Company's  merchandise  mix  during  fiscal  1995,  which  included  a number of
high-margin  proprietary  products,  private label and exclusive  products,  and
improved margins on the balance of the merchandise mix.

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 individual  product driven, as
opposed to general lines of  merchandise.  It is  impossible  to predict  future
gross margin rates.

Buying and Occupancy

Buying and occupancy  expenses  increased  $2,653,000,  or 12.4%, in fiscal 1996
from  fiscal  1995.  The  increase  primarily   reflected  the  occupancy  costs
associated  with  the  eight  new  stores  opened  during  fiscal  1996  and the
annualized occupancy cost of the ten new stores opened in fiscal 1995, which was
partially  offset by the  elimination  of the occupancy  costs of the two stores
closed during fiscal 1996.

Buying and occupancy expenses increased $1,763,000, or 9.0%, in fiscal 1995 from
fiscal 1994. The increase  primarily  reflected the occupancy  costs  associated
with the ten new stores opened during fiscal 1995, and partially to the increase
in store rents due to the expiration of certain negotiated rent concessions.

Advertising and Promotion

Advertising  and promotion  expenses for fiscal 1996  decreased  $5,974,000,  or
18.8%,  from fiscal 1995. The decrease in advertising and promotion  expense was
primarily  due to a 25% decrease in the number of catalog pages  circulated  for
the Sharper Image catalog, the decrease in the number of pages and the number of
catalogs  mailed for the SPA  Collection  catalog,  and lower paper prices since
July 1996.  The decrease in  advertising  and  promotion  expense was  partially
offset by a 3% increase in the number of Sharper Image catalogs circulated,  the
costs  incurred for the redesign of The Sharper Image catalog which was launched
in October 1996, the advertising campaign initiated during the fourth quarter in
major consumer magazines and newspapers  designed to attract new customers,  and
the test  mailings of The Sharper  Image Home  Collection.  The Company began to
receive rate  decreases in paper costs during the second quarter of fiscal 1996,
which has had a favorable  impact on costs for fiscal 1996 as compared to fiscal
1995.

Advertising  and promotion  expenses for fiscal 1995 increased  $10,317,000,  or
48.2%,  from fiscal 1994. The increase in advertising and promotion  expense was
primarily due to higher  catalog costs related to the  significant  increases in
paper costs and partially  due to a postage rate  increase in January 1995.  The
increases in paper and postage  costs had a  significant  effect on the Company.
The  Company  estimates  that about  $5.2  million  (on a pre-tax  basis) of the
increase in advertising and promotion  expense was  attributable to these higher
costs.  Another significant factor for the increase in advertising and promotion
expense was the costs  related to the test  mailings  of the  Sharper  Image SPA
catalogs. The higher catalog costs also reflect the increase of approximately 4%
in the circulation and 7% in the number of pages mailed for The Sharper Image(R)
Catalog.  These higher  catalog  costs were  partially  offset by the  Company's
efforts to reduce  these  expenses,  which  included the trimming of the catalog
dimensions by fractions of an inch, and the use of a lighter weight of paper.

While The Sharper  Image(R)  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.

                                       13

<PAGE>

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

General, Selling, and Administrative

General,  selling, and administrative  (GS&A) expenses for fiscal 1996 increased
$2,599,000,  or 5.4%,  from fiscal 1995,  primarily  due to increases in overall
selling  expenses  related to the  increase in net sales,  the increase in store
expenses  associated  with the eight new stores  opened  during  fiscal 1996, an
increase in corporate  personnel  expenses to support the additional stores, and
the  development of new retail  concepts.  Also  contributing to the increase in
GS&A  expenses was an increase in net  delivery  expense  related to  mail-order
shipments.

GS&A expenses for fiscal 1995  increased  $3,284,000,  or 7.3% from fiscal 1994,
primarily due to increases in overall selling  expenses  related to the increase
in net sales. The increase in GS&A expenses also included increases in personnel
costs to support the higher sales volume,  an increase in store expenses related
to ten new stores  opened  during  fiscal 1995,  and an increase in net delivery
expense related to the increase in mail-order sales.

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, the Company decided
to close the unprofitable SPA Collection division. As a result of the closure of
the SPA  Collection  division  during the fourth  quarter  of fiscal  1996,  the
Company  incurred a one-time  charge of  $8,000,000  ($4,800,000  net of the tax
benefit,  or 56 cents loss per share),  which  contributed  to the Company's net
loss of 53 cents per share for the  fiscal  year ended  January  31,  1997.  The
Company estimates that the phase-out period will take six to twelve months.

Other Income (Expense)

Other income (expense) for fiscal 1996 decreased  $692,000 from fiscal 1995. The
decrease in other income  (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.

Other income (expense) for fiscal 1995 increased  $730,000 from fiscal 1994. The
increase in other income  (expense)  is primarily  due to a decrease in interest
expense, an increase in interest income from available cash, and the commissions
earned from The Sharper Image(R) affinity credit card.

Income Taxes

The effective  tax rate for fiscal 1996 and fiscal 1995 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, 1997,  the Company had cash and  equivalents  of  $10,873,000,  a
decrease of $1,603,000,  as compared to $12,476,000 at January 31, 1996.  During
fiscal  1996,  the Company met its  short-term  liquidity  needs and its capital
requirements  with  available  cash,  cash flow  provided by  operations,  trade
credit, and the revolving and term loans. The decrease in cash was primarily due
to the property and equipment  expenditures related to new and remodeled stores.
At January 31, 1997,  the Company had no amounts  outstanding  on its  revolving
loan credit facility. There was $1,833,000 of CAPEX Term Loans outstanding which
was included in notes payable. The highest amount of direct borrowings under the
revolving loan credit facility during fiscal 1996 was $11,711,000, compared with
$11,000,000 in fiscal 1995. Letters of credit commitments outstanding at January
31, 1997 were $1,285,000.

In September 1994, the Company entered into a five-year revolving secured credit
facility with The CIT Group/Business Credit, Inc. The credit facility allows the
Company  to borrow  and issue  letters  of credit up to  $20,000,000  based upon
inventory  levels.  The credit  facility is secured by the Company's  inventory,
accounts  receivable,  general intangibles and certain other assets.  Borrowings
under the credit facility bear interest at either prime plus 0.75% per annum, or
LIBOR plus  2.75% per annum.  The credit  facility  contains  certain  financial
covenants  pertaining to fixed-charge  coverage ratio,  leverage ratio,  working
capital and net worth. The credit facility has limitations on operating  leases,
other borrowings, dividend payments and stock repurchases.

In May 1996,  an amendment  to the credit  facility  was  completed  with CIT to
provide for term loans for capital  expenditures  ("CAPEX  Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased  from $20.0  million to $24.5 million and the  expiration
has been extended for an additional two years to September  2001. The CAPEX Term
Loans allow the Company to borrow  amounts  for  capital  improvements.  Amounts
borrowed  under the CAPEX Term Loans bear  interest at either  prime plus 1% per
annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36
equal monthly principal installments.  Certain financial covenants of the credit
facility were revised in the amendment.

                                       14

<PAGE>

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

Liquidity and Capital Resources (continued)

Subsequent  to January 31, 1997,  two  amendments  to the credit  facility  were
completed  with  CIT  to  amend  certain  financial  covenants  and  to  provide
additional  seasonal  borrowings  during  1997.  The  credit  facility  has been
increased to $29.5 million for the period from October 1, 1997 through  December
31,  1997.  CIT also  provided  the Company a waiver for  non-compliance  of the
working  capital  and the fixed  charge  ratio  covenants  for the period  ended
January 31, 1997. The non-compliance  occurred as a result of the closure of the
SPA Collection division.

Notes payable included two mortgage loans collateralized by certain property and
equipment. In connection with the expansion of the Company's distribution center
which was completed in October 1995,  the Company  refinanced  the mortgage loan
collateralized  by the distribution  center and paid off the existing  mortgage.
The new note in the amount of $3  million  was funded in  December  1995,  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 other
note bears  interest at a variable  rate equal to the rate on 30-Day  commercial
paper plus 3.82%, provides for monthly payments of principal and interest in the
amount of $14,320,  and matures in January  2000.  Notes payable also included a
CIT funded CAPEX Term Loan which bears  interest at a variable rate equal to the
prime rate plus 1%, provides for monthly  principal  payment of $55,555 plus the
related interest payment, and matures in October 1999.

The Company's  merchandise inventory at January 31, 1997 was approximately 12.6%
higher than the prior fiscal  year.  The  increase in  inventory  reflected  the
incremental amounts for the support of eight new stores opened during 1996.

The Company leases all of its offices, stores, and seasonal warehouse space. The
Company opened six Sharper Image stores located in Chestnut Hill, Massachusetts;
Edina, Minnesota;  Raleigh, North Carolina;  Garden City, New York; Paramus, New
Jersey; and Naples,  Florida.  Two Sharper Image SPA Collection stores were also
opened. The Company remodeled five Sharper Image stores located in Redondo Beach
and San Diego,  California;  Chicago,  Illinois;  Boca Raton,  Florida;  and San
Antonio,  Texas,  and closed two stores located in Minneapolis,  Minnesota,  and
Lahaina, Maui, Hawaii.

The Company is  currently  evaluating  its plan to open one to three new Sharper
Image stores and convert  certain of the SPA Collection  stores to Sharper Image
stores during  fiscal 1997.  Total  capital  expenditures  estimated for new and
existing stores,  corporate  headquarters and the distribution center for fiscal
1997 are between $4.0 million and $6.0 million.

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.

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
condition 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  statement or reflect
events or circumstances after the date hereof.

                                       15

<PAGE>

Independent Auditors' Report
--------------------------------------------------------------------------------
Sharper Image Corporation


Board of Directors
Sharper Image Corporation
San Francisco, California

We have audited the accompanying  balance sheets of Sharper Image Corporation as
of  January  31,  1997 and  1996,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for each of the three  fiscal  years in the
period ended January 31, 1997. 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,
1997 and 1996,  and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1997 in  conformity  with
generally accepted accounting principles.

Deloitte & Touche LLP

San Francisco, California
March 28, 1997

                                       16

<PAGE>

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

                                                                       Fiscal Year Ended
                                                                           January 31,
                                                               ---------------------------------------
Dollars in thousands except per share amounts                    1997           1996           1995
------------------------------------------------------------------------------------------------------
Revenues:
<S>                                                         <C>            <C>            <C>        
         Sales                                              $   236,844    $   230,410    $   212,785
         Less: returns and allowances                            29,074         28,010         26,208
                                                            -----------    -----------    -----------
         Net Sales                                              207,770        202,400        186,577
         List rental                                              1,177          1,102          1,442
         Licensing                                                1,298            682            516
                                                            -----------    -----------    -----------
                                                                210,245        204,184        188,535
                                                            -----------    -----------    -----------

Costs and Expenses:
         Costs of products                                      108,799        102,728         96,313
         Buying and occupancy                                    23,967         21,314         19,551
         Advertising and promotion                               25,736         31,710         21,393
         General, selling, and administrative                    50,671         48,072         44,788
         Provision for loss due to closure of SPA
                  Collection division                             8,000           --             --
                                                            -----------    -----------    -----------
                                                                217,173        203,824        182,045
                                                            -----------    -----------    -----------
Other Income (Expense):
         Interest income (expense)--net                            (391)           220           (164)
         Other--net                                                  78            159           (187)
                                                            -----------    -----------    -----------
                                                                   (313)           379           (351)
                                                            -----------    -----------    -----------
Earnings (Loss) before Income Tax (Benefit)                      (7,241)           739          6,139
Income Tax (Benefit)                                             (2,896)           295          2,456
                                                            -----------    -----------    -----------
Net Earnings (Loss)                                         $    (4,345)   $       444    $     3,683
                                                            -----------    -----------    -----------
Net Earnings (Loss) Per Share                               $     (0.53)   $      0.05    $      0.41
                                                            -----------    -----------    -----------
Weighted Average Number of Shares                             8,260,208      8,682,078      8,899,289
                                                            -----------    -----------    -----------
<FN>
                                         See Notes to Financial Statements 
</FN>
</TABLE>

                                       17

<PAGE>

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


                                                         January 31,
                                                      ----------------
Dollars in thousands except per share amounts        1997           1996
--------------------------------------------------------------------------------
Assets

Current Assets:
         Cash and equivalents                     $ 10,873        $ 12,476
         Accounts receivable, net
           of allowance for doubtful
           accounts of $505 and $461                 5,915           4,436
         Merchandise inventories                    27,365          24,313
         Deferred catalog costs                      3,713           4,135
         Prepaid expenses and other                  4,495           2,576
                                                  --------       ---------
Total Current Assets                                52,361          47,936
Property and Equipment, Net                         23,012          20,726
Deferred Taxes and Other Assets                      3,431           1,794
                                                  --------       ---------
         Total Assets                             $ 78,804       $  70,456
                                                  --------       ---------

Liabilities and Stockholders' Equity

Current Liabilities:
         Accounts payable                         $ 17,025       $ 13,994
         Accrued expenses                           19,628         11,230
         Deferred revenue                            5,045          4,893
         Income taxes payable                          307            363
         Current portion of notes payable              927            223
                                                  --------       ---------
Total Current Liabilities                           42,932         30,703
Notes Payable                                        4,245          3,355
Other Liabilities                                    3,178          3,640
                                                  --------       ---------
Total Liabilities                                   50,355         37,698

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,
           8,266,940 and 8,250,980 shares               83             82
         Additional paid-in capital                  9,590          9,555
         Retained earnings                          18,776         23,121
                                                  --------       ---------
Total Stockholders' Equity                          28,449         32,758
                                                  --------       ---------
         Total Liabilities and  
         Stockholders' Equity                     $ 78,804       $ 70,456
                                                  --------       ---------

                       See Notes to Financial Statements.

                                       18

<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, 1994                           8,282,370       $       83       $   10,791       $   18,994       $   29,868
Issuance of
         common stock  for
         stock options and warrant
         (including tax benefit)                        470,070                5            1,773                             1,778
Repurchase of
         common stock                                  (469,300)              (5)          (2,532)                           (2,537)
Net earnings                                                                                                 3,683            3,683
                                                     ----------       ----------       ----------       ----------       ----------
Balance at January 31, 1995                           8,283,140               83           10,032           22,677           32,792
Issuance of
         common stock
         for stock options                               62,640                1              127                               128
Repurchase of
         common stock                                   (94,800)              (2)            (604)                             (606)
Net earnings                                                                                                   444              444
                                                     ----------       ----------       ----------       ----------       ----------
Balance at January 31, 1996                           8,250,980               82            9,555           23,121           32,758
Issuance of
         common stock
         for stock options                               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
                                                     ----------       ----------       ----------       ----------       ----------

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

                                       19

<PAGE>

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

                                                                                                    Fiscal Year
                                                                                                   Ended January 31,
                                                                                  --------------------------------------------------
Dollars in thousands                                                                   1997                 1996              1995
------------------------------------------------------------------------------------------------------------------------------------
Cash was Provided by (Used for) Operating Activities:

<S>                                                                                 <C>                  <C>               <C>     
   Net earnings (loss)                                                              $ (4,345)            $    444          $  3,683
   Adjustments to reconcile net earnings (loss) to net cash
      provided by operations:
      Depreciation and amortization                                                    4,195                3,461             3,269
      Deferred rent expense                                                              142                   69                (3)
      Deferred income taxes                                                           (3,188)                (127)              (63)
   Change in operating assets and liabilities:
      Accounts receivable                                                             (1,479)              (1,202)              581
      Merchandise inventories                                                         (3,052)                (758)            1,806
      Deferred catalog costs, prepaid expenses and other                                  54               (2,018)             (743)
      Accounts payable and accrued expenses                                           11,429(1)             4,141             4,953
      Deferred revenue and other liabilities                                            (508)                (347)            1,235
                                                                                    --------             --------          --------
   Cash Provided by Operating Activities                                               3,248                3,663            14,718
                                                                                    --------             --------          --------
   Cash was Provided by (Used for) Investing Activities:
      Property and equipment expenditures                                             (6,579)             (11,507)           (2,655)
      Disposals of equipment                                                              98                   14               191
                                                                                    --------             --------          --------
Cash Used for Investing Activities                                                    (6,481)             (11,493)           (2,464)
                                                                                    --------             --------          --------
Cash was Provided by (Used for) Financing Activities:
   Issuance of common stock for stock options and warrant                                 36                  128             1,778
   Repurchase of common stock                                                           --                   (606)           (2,537)
   Proceeds from notes payable and revolving loan                                     25,665               14,000             2,000
   Principal payments on notes payable and revolving loan                            (24,071)             (11,409)           (2,168)
                                                                                    --------             --------          --------
Cash Provided by (Used for) Financing Activities                                       1,630                2,113              (927)
                                                                                    --------             --------          --------

Net Increase (Decrease) in Cash and Equivalents                                       (1,603)              (5,717)           11,327
Cash and Equivalents at Beginning of Period                                           12,476               18,193             6,866
                                                                                    --------             --------          --------
Cash and Equivalents at End of Period                                               $ 10,873             $ 12,476          $ 18,193
                                                                                    --------             --------          --------

Supplemental Disclosure of Cash Paid for:
   Interest                                                                         $    700             $    312          $    288
   Income Taxes                                                                     $    459             $  1,971          $  1,008

<FN>
(1)Includes  $8,000 of accrued  liabilities  related  to the  closure of the SPA
Collection division.

                       See Notes to Financial Statements.
</FN>
</TABLE>
                                       20

<PAGE>

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

Fiscal Years Ended January 31, 1997, 1996, and 1995

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,  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.
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, and accounts 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 $5,306,000,  $3,807,000,  and $3,019,000, for the fiscal years ended
January 31, 1997, 1996, and 1995.

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.

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 managment 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:  Earnings  per share are based on weighted  average  common
shares  outstanding  which include common stock  equivalents  (stock options and
stock warrant).

Reclassification:  Certain  reclassifications  have  been  made to prior  years'
financial statements in order to conform with the classifications of January 31,
1997 financial statements.

New Accounting  Standards:  In February 1997, the Financial Accounting Standards
Board  issued  Statement  of  Financial  Accounting  Standards  (SFAS) No.  128,
"Earnings per Share." SFAS No.128  requires dual  presentation  of basic EPS and
diluted EPS on the face of all income  statements issued after December 15, 1997
for all entities with complex capital  structures.  Basic EPS is computed as net
income divided by the weighted  average number of common shares  outstanding for
the period.  Diluted EPS reflects the  potential  dilution that could occur from
common shares  issuable  through stock options,  warrants and other  convertible
securities.  The pro  forma  effect  assuming  adoption  of SFAS No.  128 at the
beginning of each period is presented below:

                                         Fiscal Year Ended January 31,
                                         -----------------------------
                                         1997        1996         1995
                                         ----        ----         ----
Pro forma Earnings (Loss)
Per Share:
Basic                                  $(0.53)       $0.05       $0.44
Diluted                                $(0.51)       $0.05       $0.41

                                       21

<PAGE>

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

Fiscal Years Ended January 31, 1997, 1996, and 1995

Note B--Property and Equipment

Property and equipment is summarized as follows:

                                                              January 31,
                                                         -----------------------
Dollars in thousands                                      1997            1996
--------------------------------------------------------------------------------
Leasehold improvements                                   $24,341         $22,542
Office furniture and equipment                            26,839          23,264
Transportation                                             2,422           2,266
Land                                                          53              53
Building                                                   2,874           2,873
                                                         -------         -------
                                                          56,529          50,998
Less accumulated depreciation
         and amortization                                 33,517          30,272
                                                         -------         -------
                                                         $23,012         $20,726
                                                         -------         -------

Note C--Other Assets

In May 1995, the Company  entered into an agreement under which the Company 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, 1997 and 1996 was $392,000
and $196,000.

Note D--Revolving Loan and Notes Payable

In September 1994, the Company entered into a five-year revolving secured credit
facility with The CIT Group/Business Credit, Inc. The credit facility allows the
Company  to borrow  and issue  letters  of credit up to  $20,000,000  based upon
inventory  levels.  The credit  facility is secured by the Company's  inventory,
accounts  receivable,  general intangibles and certain other assets.  Borrowings
under the credit facility bear interest at either prime plus 0.75% per annum, or
at LIBOR plus 2.75% per annum. The credit facility  contains  certain  financial
covenants  pertaining to fixed charge  coverage ratio,  leverage ratio,  working
capital and net worth. The credit facility has limitations on operating  leases,
other borrowings, dividend payments and stock repurchases.

In May 1996,  an amendment  to the credit  facility  was  completed  with CIT to
provide for term loans for capital  expenditures  ("CAPEX  Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased  from $20.0  million to $24.5 million and the  expiration
has been extended for an additional two years to September  2001. The CAPEX Term
Loans allow the Company to borrow  amounts  for  capital  improvements.  Amounts
borrowed  under the CAPEX Term Loans bear  interest at either  prime plus 1% per
annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36
equal monthly principal installments.  Certain financial covenants of the credit
facility were revised in the amendment.

Subsequent  to January 31, 1997,  two  amendments  to the credit  facility  were
completed  with  CIT  to  amend  certain  financial  covenants  and  to  provide
additional  seasonal  borrowings  during  1997.  The  credit  facility  has been
increased to $29.5 million for the period from October 1, 1997 through  December
31,  1997.  CIT also  provided  the Company a waiver for  non-compliance  of the
working  capital  and the fixed  charge  ratio  covenants  for the period  ended
January 31, 1997. The non-compliance  occurred as a result of the closure of the
SPA collection division.

At January 31, 1997 and 1996,  the  Company  had no amounts  outstanding  on its
revolving loan credit facility.  Letters of credit commitments as of January 31,
1997 were $1,285,000.

Notes payable included two mortgage loans collateralized by certain property and
equipment. In connection with the expansion of the Company's distribution center
which was completed in October 1995,  the Company  refinanced  the mortgage loan
collateralized  by the  distribution  center and paid off the existing  mortgage
(Note G). The new note in the amount of $3 million was funded in December  1995,
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 other note  bears  interest  at a variable  rate equal to the rate on 30-Day
commercial  paper plus 3.82%,  provides for monthly  payments of  principal  and
interest in the amount of $14,320,  and matures in January  2000.  Notes payable
also included a CAPEX Term Loan which bears interest at a variable rate equal to
the prime rate plus 1%, provides for monthly principal  payments of $55,555 plus
the related  interest  payment,  and  matures in October  1999.  The  respective
balance of each note  payable is  $2,887,000,  $452,000 and  $1,833,000.  Future
minimum principal payments on notes payable are as follows:

Dollars in thousands
-------------------------------------------------------------
Year ending January 31,
1998                                                $    927
1999                                                     946
2000                                                     787
2001                                                     147
2002                                                     160
Later years                                            2,205
                                                      ------
Total notes payable                                   $5,172
                                                      ------

                                       22

<PAGE>

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

Fiscal Years Ended January 31, 1997, 1996, and 1995

Note E--Income Taxes

                                                       January 31,
                                        ----------------------------------------
Dollars in thousands                       1997            1996           1995
--------------------------------------------------------------------------------
Currently payable:
         Federal                        $   248         $   359         $ 2,144
         State                               44              63             375
                                        -------         -------         -------
                                            292             422           2,519
Deferred:
         Federal                         (2,710)           (107)            (54)
         State                             (478)            (20)             (9)
                                        -------         -------         -------
                                         (3,188)           (127)            (63)
                                        -------         -------         -------
                                        $(2,896)        $   295         $ 2,456
                                        -------         -------         -------


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

                                                    January 31,
                                   ---------------------------------------------
                                      1997            1996            1995
--------------------------------------------------------------------------------
Federal tax rate                      34.0%           34.0%           34.0%
State income tax,
less federal benefit                   6.0             6.0             6.0
                                     -------         -------         -------
Effective tax rate                    40.0%           40.0%           40.0%
                                     -------         -------         -------

Deferred taxes result from  differences in the recognition of expense for income
tax and financial reporting purposes.  Temporary  differences which give rise to
deferred tax assets (liabilities) are as follows:

                                                     January 31,
                                   ---------------------------------------------
Dollars in thousands                          1997                1996
--------------------------------------------------------------------------------
Current:
         Nondeductible reserves          $   4,457           $   2,844
         Deferred catalog costs             (1,485)             (1,654)
         State taxes                          (551)               (522)
         Valuation allowance                   --                   --
                                          --------            --------
Current--net                                 2,421                 668
                                          --------            --------
Noncurrent:
         Deferred rent                       1,566               1,251
         Depreciation                        2,512               1,248
         Deductible software costs            (924)               (800)
         Other--net                           (168)               (148)
         Valuation allowance                   --                  --
                                          --------            --------
Noncurrent--net                              2,986               1,551
                                          --------            --------
Total                                     $  5,407            $  2,219
                                          --------            --------

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, 1997, are as follows:

Dollars in thousands
--------------------------------------------------------------------------------
Year ending January 31,
1998                                                 $ 14,002
1999                                                   13,977
2000                                                   13,659
2001                                                   12,181
2002                                                    8,120
Later years                                            28,276
                                                     --------
Total minimum lease commitments                      $ 90,215
                                                     --------

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,
                                    -----------------------------------
Dollars in thousands                    1997         1996        1995
--------------------------------------------------------------------------------
Minimum rentals                     $ 13,259      $ 11,917     $ 11,094
Percentage rentals and
other charges                          5,546         5,093        4,540
                                    --------      --------     --------
                                    $ 18,805      $ 17,010     $ 15,634
                                    --------      --------     --------

                                       23

<PAGE>

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

Fiscal Years Ended January 31, 1997, 1996, and 1995

Note G--Related Party Transactions

In October 1993, the Company  refinanced one of its existing mortgage loans with
a loan of $300,000 from a minority stockholder and director of the Company. This
loan balance of $256,000 was paid in full in December 1995.

In 1993, the Company  acquired the rights to manufacture  certain products along
with related  tooling and equipment from a former  director of the Company.  The
agreement provided for ongoing  manufacturing  assistance with payments based on
sales of certain  products.  Under the agreement,  the Company paid $640,000 for
the fiscal year ended January 31, 1995. In October 1994, the Company  negotiated
for  the  early  settlement  of all  amounts  and  obligations  due  under  this
agreement, and no further payments are required.

Note H--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.  The Company
did not repurchase any shares during fiscal 1996.  During fiscal 1995 and fiscal
1994, the Company  repurchased  94,800 shares for $606,000 and 56,300 shares for
$378,000  under this stock  repurchase  program.  Through  January 31, 1997, the
Company has  repurchased a total of 151,100  shares at an average price of $6.54
per share.

In November 1994, ING Capital, a former lender, exercised its rights to purchase
413,000 shares of the Company's common stock under a warrant  agreement at $2.80
per share, which represented the fair market value of the Company's stock at the
date of the warrant  issuance,  plus an amount equal to 15% of the excess of the
current  market value of the Company's  stock at the time of exercise over $5.00
per share. Under a separate resolution, the Board approved the repurchase of the
outstanding shares owned by ING Capital. The net cash expended by the Company as
a result of the  exercise of the warrant and the  subsequent  repurchase  of the
shares was $1,000,000.

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.
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. During
1995,  with  stockholders'  approval,  the Company amended the 1985 Stock Option
Plan to  increase  the number of shares of its  common  stock  reserved  for the
issuance of additional stock options by 750,000 shares, limit the maximum number
of shares  any one  individual  may be  granted  per  fiscal  year,  expand  the
eligibility  provisions  to  allow  individuals  owning  more  than  25%  of the
Company's  common  stock to receive  stock  options and render the  non-employee
members of the Board ineligible to receive stock option grants under this plan.

In 1995, the Company also  implemented  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. 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 will be subject to repurchase by
the Company upon the optionee's cessation of Board service prior to vesting.

At January 31, 1997, the Company had reserved  636,420 shares and 33,000 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,  45% in fiscal 1996 and fiscal
1995; risk free interest  rates,  6.21% in fiscal 1996 and 6.23% in fiscal 1995;
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  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
$(4,576,000)  ($0.55 loss per share) in fiscal 1996 and $317,000 ($0.04 earnings
per share) in fiscal 1995. 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 1996 and fiscal 1995 pro forma adjustments
are not indicative of future period pro forma adjustments,  when the calculation
will apply to all future applicable stock options.

                                       24

<PAGE>

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

Fiscal Years Ended January 31, 1997, 1996, and 1995

Note H--Stockholders' Equity (continued)

The following table reflects the activity under these plans:

                                                                   Weighted
                                                   Number of       Average
                                                    Options     Exercise Price
                                                   ---------------------------
Balance at January 31, 1994                         756,590         $1.99
Granted                                             378,100          6.73
Exercised                                           (57,070)         1.94
                                                -----------
Cancelled                                          (113,950)         1.98
Balance at January 31, 1995                         963,670          3.88
Granted (weighted average fair value of $2.76)      630,100          5.65
Exercised                                           (62,640)         2.06
Cancelled                                          (352,860)         6.80
                                                -----------
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
                                                -----------

Exercisable at January 31, 1996                     624,000         $1.70
                                                -----------
Exercisable at January 31, 1997                     650,000         $2.49
                                                -----------
<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>                   <C>  
          $1.16-$1.99        333,690               4.8                $1.81             323,000               $1.81
           2.00- 3.99      1,089,910               9.3                 3.37             295,000                2.92
           4.00- 7.00         80,900               8.0                 5.27              32,000                5.51
                           ---------                                                    -------                     
          $1.16-$7.00      1,504,500               8.2                $3.13             650,000               $2.49
                           ---------                                                    -------                     
</TABLE>

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, the Company decided
to close the unprofitable SPA Collection division.

Related to the closure of the SPA Collection division, for the fourth quarter of
fiscal 1996, the Company  incurred a one-time  charge of $8,000,000  ($4,800,000
net of the tax benefit,  or 56 cents loss per share). The Company estimates that
the  phase-out  period will take six to twelve  months.  The one-time  charge of
$8,000,000 is primarily  related to the lease commitments and the net book value
of fixed assets related to the SPA Collection division.

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 condition.

                                       25

<PAGE>

<TABLE>
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Sharper Image Corporation

Fiscal Years Ended January 31, 1997, 1996, and 1995

Note K--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 31,1997                                          1996            1996             1996             1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>              <C>              <C>     
Revenues                                                                $ 36,501         $ 44,186         $ 39,368         $ 90,190
Expenses
         Cost of products                                                 19,245           22,872           20,282           46,400
         Buying and occupancy                                              5,601            5,785            6,071            6,510
         Advertising and promotion                                         4,726            5,806            4,562           10,642
         General, selling and administrative                              10,651           11,370           11,064           17,586
         Provision for loss due to closure
                  of SPA Collection division(1)                             --               --               --              8,000
Other income (expense)                                                        21             (106)            (184)             (44)
Earnings (loss) before income tax (benefit)                               (3,701)          (1,753)          (2,795)           1,008
Income tax (benefit)                                                      (1,480)            (701)          (1,118)             403
Net earnings (loss)                                                     $ (2,221)        $ (1,052)        $ (1,677)        $    605
Net earnings (loss) per share                                           $  (0.27)        $  (0.13)        $  (0.20)        $   0.07

                                                                                         Three Months Ended
                                                                        ------------------------------------------------------------
                                                                         April 30,       July 31,        October 31,     January 31,
Fiscal year ended January 31,1996                                          1995            1995             1995             1996
------------------------------------------------------------------------------------------------------------------------------------
Revenues                                                                $ 37,696         $ 45,764         $ 41,335         $ 79,389
Expenses
         Cost of products                                                 19,166           22,614           20,582           40,366
         Buying and occupancy                                              4,903            5,199            5,370            5,842
         Advertising and promotion                                         5,604            8,757            5,860           11,489
         General, selling and administrative                               9,791           11,338           10,847           16,096
Other income (expense)                                                       213              213              (67)              20
Earnings (loss) before income tax (benefit)                               (1,555)          (1,931)          (1,391)           5,616
Income tax (benefit)                                                        (622)            (772)            (556)           2,245
Net earnings (loss)                                                     $   (933)        $ (1,159)        $   (835)        $  3,371
Net earnings (loss) per share(2)                                        $  (0.11)        $  (0.14)        $  (0.10)        $   0.39

<FN>
(1)See Note I for discussion on the closure of SPA Collection Division.

(2)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 and stock warrant).  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                     Lawerence Feldman
Founder                                Chairman Emeritus
Chairman of the Board                  San Francisco Mart
Chief Executive Officer
                                       J. Gary Shansby
Elyse Eng Thalheimer                   Founder
                                       The Shansby Group
Alan Thalheimer
Retired Business Executive             Gerald Napier*
                                       Retired President of
Maurice Gregg                          I. Magnin and Company
Retail Financial Consultant            *Joined April 1997.


Officers
--------------------------------------------------------------------------------
Richard Thalheimer                     Jennifer Grellman                        
Founder                                Vice President                           
Chairman of the Board                  Corporate Marketing                      
Chief  Executive  Officer                                                       
                                       Greg Hickey                           
Barry Gilbert                          Vice President                     
Vice Chairman                          Management  Information Systems          
Chief  Operating  Officer                                                       
                                       Barry Jacobsen                          
Craig Womack                           Vice President
President                              Distribution
Chief Administrative Officer 
                                       Mary MacKenzie
Vincent Barriero                       Vice  President 
Senior Vice President                  Human  Resources
Chief Information  Officer 
Assistant  Corporate Secretary         Richard  Mueller
                                       Vice  President
Shannon King                           Merchandising
Senior  Vice  President  
Merchandising                          Woodrow Nelson 
                                       Vice President
Sydney  Klevatt                        Creative Services
Senior  Vice  President
Marketing                              Judith Serlin
                                       Vice President
Tracy Wan                              Merchandising
Senior Vice President  
Chief  Financial  Officer              Charles  Taylor
Corporate Secretary                    Vice President
                                       TSI Design

                                       Joe Williams
                                       Vice President
                                       Loss Prevention


           
Corporate Information
--------------------------------------------------------------------------------
Corporate Headquarters
650 Davis  Street 
San  Francisco,  CA 94111  
Telephone  (415)  445-6000  
FAX:  (415) 445-1574  

Transfer  Agent and  Registrar  
Chase Mellon  Shareholder  Services 
50 California  Street 
San Francisco,  California  94111

Corporate  Counsel 
Brobeck, Phleger & Harrison LLP 
One Market 
Spear Street Tower 
San  Francisco,  California 94105 

Certified Public  Accountants  
Deloitte & Touche LLP 
50 Fremont Street 
San Francisco,  CA 94105 

SEC Form 10-K 
A copy of the Company's annual report to the Securities and Exchange  Commission
of Form 10-K  (exclusive of exhibits) is available  without  charge upon written
request to:
      Investor Relations 
      The Sharper Image 
      650 Davis Street 
      San Francisco, CA 94111 

Annual Meeting 
The Annual Meeting of Stockholders of Sharper Image  Corporation will be held on
Monday June 9, 1997, at 2 pm at the World Trade Club, Ferry Building, Coit Tower
Room, San Francisco, California.


--------------------------------------------------------------------------------
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 1996  High     Low

First Quarter     6 1/4     3 5/8

Second Quarter    6 3/8     3 1/2

Third Quarter     4 1/2     3 1/4

Fourth Quarter    4 1/8     3 1/8

                                       27