SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

( X )    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended January 31, 1999

                                       or
 (   )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

               For the transition period from ________ to _______

                         Commission File Number 33-12755

                            SHARPER IMAGE CORPORATION
             (Exact name of registrant as specified in its charter)
 
           Delaware                                            94-2493558
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)

                650 Davis Street, San Francisco, California 94111
               (Address of principal executive offices) (Zip Code)

               Registrant's telephone number including area code:
                                 (415) 445-6000

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, par value $.01
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
                                  Yes  X    No 
                                      ---      ---

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

  The aggregate market value of the voting stock held by non-affiliates of the
                Registrant as of April 15, 1999 was $42,462,174.

   The number of shares of Common Stock, with $.01 par value, outstanding on
                      April 15, 1999 was 8,959,648 shares.

Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January  31, 1999 are  incorporated  by  reference  into Parts II and IV of this
Report.  Portions of  Registrant's  Proxy  Statement  for the Annual  Meeting of
Stockholders to be held June 7, 1999 are incorporated by reference into Part III
of this report.

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                                     PART 1

         This Annual Report on Form 10-K and the documents  incorporated  herein
by reference of Sharper Image Corporation  (referred to as the "Company" or "The
Sharper Image") contain forward-looking  statements that have been made pursuant
to the provisions of the Private Securities  Litigation Reform Act of 1995. Such
forward-looking  statements are based on current  expectations,  estimates,  and
projections  about the  Company's  industry,  management's  beliefs  and certain
assumptions  made by the  Company's  management.  Words  such as  "anticipates,"
"expects,"  "intends," "plans," "believes," "seeks,"  "estimates," or variations
of  such  words  and  similar   expressions,   are  intended  to  identify  such
forward-looking  statements.  These  statements  are not  guarantees  of  future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict.  Therefore,  actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating  Results"  on  pages 10  through  16,  as well as  those  noted in the
documents incorporated herein by reference.  Unless required by law, the Company
undertakes  no  obligation to update  publicly any  forward-looking  statements,
whether as a result of new  information,  future events or  otherwise.  However,
readers  should  carefully  review the  statements set forth in other reports or
documents the Company files from time to time with the  Securities  and Exchange
Commission,  particularly  the  Quarterly  Reports on Form 10-Q and any  Current
Reports on Form 8-K.

Item 1. Business

Overview

         The Sharper Image Corporation is a specialty  retailer which introduces
and sells quality,  innovative,  useful and  entertaining  products  through The
Sharper Image stores, monthly mail-order catalog,  Internet, and other marketing
channels.

         The Company was founded in 1977 by Richard Thalheimer, who continues as
Chairman and Chief  Executive  Officer.  First mailed in 1981, The Sharper Image
Catalog found success in the growing field of mail-order shopping.  Expansion of
The Sharper Image concept to retail stores began in 1984,  and as of January 31,
1999, the Company  operated 87 The Sharper Image stores in the United States and
licensees  operated  six stores  internationally  and two airport  stores in the
United States. The typical Sharper Image stores range from  approximately  2,200
to 2,500 selling square feet in size,  with several larger size stores that have
3,000 to 5,000 selling square feet.

         During the fiscal  year ended  January  31,  1999  (fiscal  1998),  the
Company  opened four new stores of The  Sharper  Image  concept and format.  Two
Sharper  Image stores were closed at the maturity of their  leases.  The Company
plans to open three to five new stores during the fiscal year ending January 31,
2000 (fiscal  1999).  Lease terms for certain of the existing The Sharper  Image
store  locations will be maturing  during fiscal 1999 and these locations may be
relocated  or closed.  The Company  employs  approximately  1,300  employees  in
twenty-eight states and the District of Columbia.

         In  addition  to serving as the  primary  advertising  vehicle  for the
Company's stores, The Sharper Image Catalog generated approximately 29% of total
revenues in fiscal 1998. The monthly catalog,  which ranged from 52 to 124 pages
in fiscal  1998,  is  recognized  for  creative  excellence  within the  catalog
industry.  Worldwide, the Company mailed approximately 41 million of The Sharper
Image Catalogs in fiscal 1998.

         The Company's  Internet sales in fiscal 1998 increased over 200 percent
to $4.9  million  from $1.6  million in the fiscal  year ended  January 31, 1998
(fiscal 1997). The Company believes the Internet is a significant  marketing and
sales  opportunity.  The  Sharper  Image  Catalog  is on the  World  Wide Web at
http://www.sharperimage.com.  While this sales  channel is still  emerging,  the
Company is  encouraged  with the sales  growth in the Internet  marketplace  and
expects to  continue be a leader as this market  continues  its dynamic  growth.
Other  Internet sales channels  currently  used by the Company  include  America
Online's  Shopping  Channel,  Microsoft  Plaza,  Yahoo  Stores,  @ Home Network,
Catalog City and PC World Shopping.

         The  Company is known for its varied  product  mix and a  merchandising
philosophy focusing on innovative, well-designed, high-quality products that are
developed by The Sharper Image,  exclusive to The Sharper  Image,  or in limited

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distribution.  In product lines where the Company  competes  directly with other
retailers,  it chooses to sell the best  version  of the  product  with the most
advanced  features.  The Company is frequently sought after by manufacturers and
inventors to launch  technologically  innovative products with features that are
unique and surprising.

         During  fiscal  1998,  the Company  continued  the  development  of its
in-house Sharper Image Design product  development  function.  The percentage of
sales attributable to Sharper Image Design  proprietary  products increased from
eight percent in fiscal 1997 to 18 percent in fiscal 1998. This increase was the
primary reason that the gross margin  percentage rate improved by 2.7 percentage
points in fiscal  1998.  The  Company's  goal is to  continue  to  increase  the
proportion of sales from Sharper Image Design proprietary products.

         The  Company's  business  is highly  seasonal,  with sales peaks at the
holiday periods of Father's Day and Christmas. See "Seasonality."  Historically,
the typical Sharper Image demographic mix has been upper income.

         In addition to its primary businesses,  The Sharper Image leverages its
brand name and reputation through a corporate marketing program, wholesale sales
of Sharper Image brand products,  which include Sharper Image Design proprietary
products and  private-labeled  products,  and a product  licensing  program with
selected  businesses.  Wholesale  sales are made  primarily  to fine  department
stores and to international retailers.

Store Operations

         The   Sharper   Image   stores  are  located   throughout   the  United
States-typically  in densely populated downtown financial districts and business
centers, upscale shopping malls and drive-up suburban locations.

         Each  store  is  generally  staffed  with  approximately  six to  eight
employees,  including a manager, an assistant manager, a senior sales associate,
sales  associates,  and other support  staff. A few of the Company's high volume
stores  are  staffed  with  11  to  15  associates.   Current  store   personnel
compensation  structure is based largely on commission and is closely  monitored
in relation to sales. The Company expends considerable effort to train its sales
associates on the many new, and often technically oriented products, in order to
maintain a high customer service level.

         The Sharper Image stores are designed by the Company's  design staff at
the Company's  headquarters  to standardize  layout,  where  possible,  so as to
simplify their  operations.  The stores are operated  according to  standardized
procedures  for customer  relations,  merchandise  display and pricing,  product
demonstration,  inventory  maintenance,  personnel training,  administration and
security.  The Company's  original  Sharper Image stores typically have 2,200 to
2,500 square feet of selling space and approximately  1,300 to 2,200 square feet
of  storage  and  administrative  space.  The  cost of  leasehold  improvements,
fixtures and other equipment  associated with the opening of a new Sharper Image
store has averaged approximately  $350,000 to $450,000.  Initial inventory for a
new Sharper Image store has generally cost approximately $200,000. Outlet stores
are  approximately  half the cost of the  original  Sharper  Image  stores.  The
Company also  operates a second  retail  format of Sharper  Image Design  stores
which are approximately  half the size of the original stores with between 1,000
to 1,200 of selling square feet, and feature higher margin proprietary  products
in addition to other top selling  merchandise.  At the end of fiscal  1998,  the
Company had 77 The Sharper Image stores,  eight Sharper Image Design stores, and
two outlet locations.

         In fiscal 1997 the Company retained a leading design firm to update the
look and appeal of its retail stores. During fiscal 1998 the Company opened four
new stores and  remodeled  four stores  utilizing  the new look.  The Company is
currently  evaluating  the  financial  results of the new  prototype  in the new
stores and remodeled stores.

The Sharper Image Catalog

         The Sharper Image Catalog is a full-color  catalog that is mailed to an
average of  approximately 3 million  individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1998, the Company mailed  approximately 41 million of The Sharper Image Catalogs
to over 6 million different individuals.  Circulation and number of pages of The
Sharper Image Catalog is under continual  review to balance the costs of mailing
the catalogs with the revenues generated.  The mailings increase at Father's Day
and Christmas reflecting the seasonal nature of the Company's business.

         The Sharper  Image  Catalog is designed and  produced by the  Company's
in-house  staff  of  writers  and  production  artists.   The  Company  utilizes
free-lance  photographers on an as needed basis.  The catalog is  electronically
produced in-house on a network of computers using the latest desktop  publishing
software. This enables the Company to maintain quality control and shorten the


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lead-time needed to produce the catalog. The monthly production and distribution
schedule permits frequent changes in the product selection.  During fiscal 1998,
The Sharper Image Catalog  typically  contained from 52 to 84 pages for non-peak
months and  between 76 and 124 pages for the peak  seasons of  Father's  Day and
Christmas.   The  Sharper  Image  catalog  design  uses  dramatic   visuals  and
benefit-oriented  clever product  descriptions.  The catalog design features the
most  important  products  prominently.  The number of items featured each month
ranges between 180 and 250 products during the first three quarters of the year,
increasing to more than 300 products during the fourth quarter.

         During  fiscal  1998,  the  Company  discontinued  its test  mailing of
catalogs for The Sharper Image Home Collection concept.  The Company mailed over
3 million Sharper Image Home Collection catalogs during fiscal 1998.

         The Company  collects  customer  names through mail and Internet  order
processing and the electronic  point-of-sale registers in its retail stores. The
names and  associated  sales  information  are merged  daily into the  Company's
customer  master file.  This daily merge process  provides a constant  source of
current information to help assess the effectiveness of the catalog as a form of
retail  advertising,  identify new  customers  that can be added to the in-house
mailing list without using customer lists  obtained from other  catalogers,  and
identify the "best  customers." The Company's  addition of names to the in-house
mailing list  enhances  its value for list rental  purposes.  Periodically,  the
Company mails promotional material to these best customers, which is designed to
produce incremental sales.

Internet Operations

         The Sharper Image was one of the first specialty retailers to enter the
world of electronic commerce. The Company's revenue from its Internet operations
increased  over 200 percent in fiscal 1998 to $4.9  million from $1.6 million in
fiscal 1997. The Company has  participated in online shopping since 1994 and has
maintained  its own site on the  World  Wide Web at  http://www.sharperimage.com
since 1995.  In  addition  other  Internet  sales  channels  used by the Company
include  America  Online's  Shopping  Channel,  Microsoft  Plaza,  Yahoo Stores,
Catalog  City  and PC  World  Shopping.  The  Company  believes  that one of the
advantages of the Internet is the ability to introduce and/or market merchandise
at a relatively  low cost.  The Company can present a full spectrum of styles or
models and in-depth  promotions at reasonable cost,  especially  compared to the
higher cost of a  comparable  presentation  in The Sharper  Image  Catalog.  The
Company recently  introduced an auction site at its  sharperimage.com  web site.
Unlike most other auction sites on the Internet, the Company's auction site is a
transaction  between an  established  retailer and the consumer and the auctions
feature both new and refurbished  products with return  privileges.  The Company
has been able to develop and expand its Internet business without incurring high
start-up costs because of its market leadership position, its brand name and its
strategic alliances.  In addition, the Company leverages its experience in order
processing,  fulfillment  and customer  service  gained in over 20 years of mail
order catalog operations.

Other Operations

Corporate Marketing

         During fiscal 1998, the Company's  corporate  marketing sales continued
to grow.  The  incentive  and gifting  programs  are  designed by the  corporate
marketing  unit to be used by client  companies to increase  their sales,  or to
motivate and reward their high achievers and best  customers.  The Sharper Image
stores and catalog are the primary means of offering and conveniently delivering
the  incentives  and gifts.  The Company sells  incentive  and gift  merchandise
certificates  to the client  companies who in turn  distribute  them under their
programs.  The certificates are redeemable for Sharper Image merchandise through
its  retail  stores,  by  mail,  or  over  the  telephone  through  the  catalog
telemarketing  group.  The Company is also  developing the Internet  channel for
this area of the business.  The Company intends to continue to grow this area of
its business.

Wholesale Operations

         The  Company's  Business  Development  department  is the primary group
responsible for marketing to other retailers,  including fine department  stores
in the U.S. as well as retailers in other  countries.  Wholesale sales increased
from $3.2 million in fiscal 1997 to $3.5 million in fiscal 1998. Wholesale sales
increased  during fiscal 1998 primarily as result of increased  sales of Sharper
Image Design proprietary products.


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Licensed Operations

         The Company has exclusive  licensing  agreements in Japan,  Switzerland
and Saudi Arabia,  as well as for non-duty free airport  locations in the United
States. Under the international license agreements,  the licensee is granted the
right to use the  trademarked  name,  "The Sharper  Image," in their  country in
connection  with The Sharper  Image  retail  store and catalog  operations.  The
Company will assist the licensee by producing a foreign  language edition of The
Sharper  Image  catalog,  with  economies  of scale  but at the  expense  of the
licensees who then print and distribute locally. There are currently six Sharper
Image retail stores operated by the foreign licensees, two in Switzerland, three
in Saudi Arabia and one in Dubai. The Company receives royalties on sales by the
licensees.  Licensees  purchase  products  from the  Company  or  directly  from
manufacturers,  maintain their own supply of inventory,  and establish their own
product  prices.  The airport  licensee is entitled to utilize The Sharper Image
trademark and trade dress in designated airport  locations,  the design of which
is subject to the  approval of the  Company.  There are two  locations -- one at
Dallas-Fort  Worth and a second  location at Detroit  Metropolitan.  The Company
continues to pursue additional licensing and wholesale  opportunities in foreign
countries.

Merchandising, Product Selection and Development

Merchandising

         The Company's  merchandise mix emphasizes  innovative products that are
new to market, and unique products, which are proprietary, available exclusively
through The Sharper  Image,  or are not  available  in broad  distribution.  The
Company's  sales are driven by individual  products,  focusing on offering items
that are innovative and high quality,  as distinguished  from a broad assortment
of  categories  of  merchandise.  As  individual  items  come to  market  or are
developed internally by the Company that fit the criteria for new products,  the
Company's buying and merchandise mix will change to emphasize those products. As
a result of such shifting  emphasis among individual  items, the mix of sales by
category  changes from time to time.  The effect,  from year to year,  can be to
increase or decrease the merchandise gross margin rates since some categories of
merchandise sustain  traditionally higher margins and some traditionally sustain
lower margin rates.

         The Company's  current  merchandise  strategy is to offer an assortment
with emphasis on Sharper Image Design  proprietary  and private label  products.
The Company intends to focus on offering products in the $50 to $300 price range
to appeal to a wide customer base. While these  proprietary and  private-labeled
products offer important sales and gross margin growth opportunities for all the
revenue generating areas of the Company, there are certain risks associated with
these internally developed products, such as possible manufacturing constraints,
delays in bringing  these  products to market and cost  increases.  See "Factors
Affecting Future Operating Results."

         The Company generates  information on merchandise orders and inventory,
which is reviewed daily by the Company's buyers, its senior  merchandising staff
and top management.  The Company generally replaces  approximately 10% to 25% of
its product offerings each month. The Company carefully considers which products
will not be offered in future  months  based upon  numerous  factors,  including
revenues generated,  gross margins,  the cost of catalog and store space devoted
to each product, product availability and quality.

         The Company has developed a proprietary automatic  replenishment system
(ARS) which is used to maximize sales with minimal inventory  investment.  Under
ARS,  information on  merchandise  inventory and sales by each store location is
generated  and  reviewed  daily.  Sales  information  by product and location is
systematically compared daily to each product's "model stock" to determine store
shipment quantities and frequency. The ARS computes any adjustments to the model
stock  level based on factors  such as sales  history by location in relation to
total  Company  sales of each  product.  Under this  system,  the model stock is
continually  revised based on this  analysis.  Recommended  adjustments to model
stock  levels  and  recommended  shipment  amounts  are  reviewed  daily  by the
Company's  group  of  store  distributors  and  merchandising  managers  who are
responsible for allocating inventory to stores.

Product Selection

         The process of finding  new  products  involves  the  Company's  buyers
reviewing voluminous product literature,  traveling  extensively  throughout the
United  States  and the Far East to  attend  trade  shows and  exhibitions,  and
meeting with  manufacturers.  The Company enjoys  relationships  with many major
manufacturers  who use The Sharper  Image  regularly to  introduce  their newest
products in the United States. See "Factors Affecting Future Operating Results."


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         The Company  purchases  merchandise  from numerous foreign and domestic
manufacturers and importers.  None of the Company's suppliers accounted for more
than 10% of the dollar amount of the Company's  purchases during fiscal 1998. Of
the products offered by the Company in the past fiscal year,  approximately  75%
were manufactured in the Far East,  approximately  20% were manufactured  within
the  United  States,   approximately  3%  were   manufactured  in  Europe,   and
approximately  2% were  manufactured  in Mexico and Canada.  The Company expects
these percentages to vary as new products are introduced. See "Factors Affecting
Future Operating Results."

Product Development

         In addition to finding new products from outside sources, the Company's
product  development group conceives,  designs and produces Sharper Image Design
proprietary products. The new product development group meets regularly with the
merchandising staff to review new product  opportunities,  product quality,  and
customer  feedback.  From these  creative  sessions  product  ideas are put into
development, design and production.  Successful product introductions during the
past two years  include the Ionic Breeze  silent air  purifier,  CD  Radio/Alarm
Clock with Sound Soother,  Weebot,  the Electronic Pet, Personal Cooling System,
Turbo  Groomer,  Truth  Quest,  Ionic Hair Wand,  Stereo Sound  Soother,  Shower
Companion Plus, and the portable Sound Soother.

         The  Company  believes  that  this  proprietary   product   development
function,  in  addition  to  increasing  its sales and gross  margins and adding
incremental wholesale sales, will favorably impact the Company's increasing flow
of unique and exclusive  products in The Sharper  Image stores,  catalog and our
Internet site  sharperimage.com.  The Company  believes that the appeal of these
proprietary  products is also serves as a key driver in broadening  its customer
base and  enhancing its brand appeal.  The  Company's  goal is to  significantly
increase the proportion of sales and margin contributions from these proprietary
products.  However,  there  is no  assurance  that the  Company  will be able to
continue  the  growth of gross  margin and sales  related  to these  proprietary
products. See "Factors Affecting Future Operating Results."

         Sharper Image Design proprietary  products are produced for the Company
on a contract basis by  manufacturers  in the Far East. The Company provides all
product specifications to the contract  manufacturers.  Development lead-time is
generally  in  the  range  of  12  to  18  months.   However,   certain  product
introductions may require longer lead time.

Customer Service

         The  Company  seeks to hire and  retain  qualified  sales and  customer
service  representatives in both its mail-order catalog and store operations and
to train them thoroughly.  Each new store manager undergoes an intensive program
during  which the manager is trained in all aspects of the  Company's  business.
Sales personnel are trained during the first two weeks of employment,  or during
the weeks before a new store opens.  Training  focuses  primarily on acquiring a
working knowledge of the Company's products and on developing selling skills and
an understanding of the Company's high customer  service  standards.  Each sales
associate is trained to adhere to the Company's philosophy of "taking ownership"
of every customer  service issue that may arise.  The Company has also developed
ongoing  programs  conducted  at each  store  that  are  designed  to keep  each
salesperson up to date on each new product offered.

         The Company's customer service and catalog sales group at the corporate
headquarters  and at the  Little  Rock  distribution  center  provides  personal
attention  to  customers  who call toll free to request a catalog  subscription,
place an order,  or inquire  about a product.  The Company also  contracts  with
third party  contract  call  centers to provide  twenty-four  hour  coverage for
customer  services and catalog sales.  The Company's  Customer  Service group is
also responsible for resolving  customer problems promptly and to the customer's
complete satisfaction.  The Company is committed to providing its customers with
courteous, knowledgeable, and prompt service.

Advertising

         While the catalog remained the Company's  primary  advertising  vehicle
during  fiscal  1998,  the Company also  utilized  newspaper,  leading  consumer
magazine  and airline  magazine  inserts to  advertise  specific  products.  The
Company plans to continue  these efforts in fiscal 1999. The Company also tested
televised  "infomercials"  in fiscal  1998 and plans to  increase  the number of
infomercials in fiscal 1999. The Company believes these advertisements  generate
store sales as well as mail-order sales.

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Catalog Order Fulfillment and Distribution

         The Company has a single distribution facility in Little Rock, Arkansas
of  approximately  110,000 square feet. The Company's  merchandise  generally is
delivered to the catalog and Internet  customers and to The Sharper Image stores
directly  from the  Company's  distribution  facility.  A number of products are
shipped directly from the vendor to the customer or to the stores.  The shipment
of products  directly from vendors to the stores and customers reduces the level
of inventory required to be carried at the distribution  center,  freight costs,
and the  lead-time  required  to receive the  products.  Each  catalog  order is
received via remote  terminal at the  distribution  facility after the order has
been approved for shipment.  The Company's goal is to ship catalog orders within
48 hours  after the order is  received.  Store  customers  generally  take their
purchase with them.  The Company is evaluating the need to increase the capacity
of the  distribution  facility in Little Rock to provide for projected  business
growth.

         Sales and inventory  information  about catalog and store operations is
provided on an ongoing  basis to the  Company's  merchandising  staff and to top
management  for  review.  The  Company's  stores are  equipped  with  electronic
point-of-sale  registers that communicate daily with the main computer system at
corporate headquarters,  transmitting sales, inventory and customer data as well
as receiving data from the Company's  headquarters.  The sales,  inventory,  and
customer data enables sales and corporate  personnel to monitor sales by item on
a daily  basis,  provides  the  information  utilized  by the ARS for  inventory
allocations,   provides   management  with  current  inventory  and  merchandise
information,  and enables our in-house mailing list to be updated regularly with
customer names and activity.

Information Systems

         The Company continually evaluates and enhances its computer systems and
information  technology in connection  with  providing  additional  and improved
management  and  financial  information.  In fiscal  1998 and  1999,  technology
development and enhancement initiatives for the Company's web site are also part
of the key objectives of its information systems team.

         The Company recognizes that the arrival of the year 2000 poses a unique
worldwide  challenge to the ability of all systems to recognize  the date change
from December 31, 1999 to January 1, 2000. The Company has reviewed 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.

Competition

         The Company operates in a highly competitive  environment.  The Company
principally  competes with a diverse mix of department  stores,  sporting  goods
stores,  discount  stores,  specialty  retailers  and other  catalogs that offer
products similar to or the same as some of those offered by the Company. Many of
the Company's competitors are larger companies with greater financial resources,
a wider selection of merchandise and a greater inventory availability.  Although
the Company  attempts to market products not generally  available  elsewhere and
has emphasized  exclusive  products in its merchandising  strategy,  many of its
products or similar products can also be found in other retail stores or through
other catalogs or on-line.  The Company offers  competitive  pricing where other
retailers market certain products identical to the Company's at lower prices. In
addition, a number of other companies have attempted to imitate the presentation
and method of operation of the Company's  catalog and stores,  and the Company's
proprietary designed products.  The Company competes principally on the basis of
product exclusivity,  selection, quality and price of its products,  merchandise
presentation  in the catalog,  stores,  and on the Internet,  its customer list,
name  recognition,  and the  quality of its  customer  service.  The  Company is
committing  additional  resources to its internal product  development  group to
create and produce proprietary products exclusively  available from the Company.
The Company  believes  that these  proprietary  products  provide a  competitive
advantage for the Company in its merchandising offering.

Trademark Licenses

         In the opinion of management, the Company's registered service mark and
trademark,  "The  Sharper  Image,"  and the brand name  recognition  that it has
developed,  are of significant  value. The Company currently licenses the use of
its  trademarked  name in connection  with the  production  and  circulation  of
foreign language  editions of The Sharper Image catalog in Japan and Switzerland
and in connection with The Sharper Image stores in Switzerland, Saudi Arabia and
Dubai in  consideration  for  royalties  and other  fees.  In  addition to these
international  licensees,  the Company has also  entered  into a license for the
right to  operate  Sharper  Image  stores  in  domestic  non-duty  free  airport
locations as well as various product license agreements which grant the right to
licensees to manufacture and sell products bearing the Company's trademark.

                                                                               7

<PAGE>


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. In addition,  as the proportion of the Company's  revenues
derived from store sales has grown,  the impact of seasonal  fluctuations on the
Company's  sales  and  earnings  has  increased.  As  a  result,  a  substantial
percentage of the Company's  total revenues and all or most of the Company's net
earnings  occur in its fourth  fiscal  quarter  ending  January  31. The Company
generally  experiences  lower  revenues  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 these interim quarters may not be representative
of the results for the full fiscal year. In addition,  like many retailers,  the
Company makes  merchandising  and inventory  decisions for the Christmas  season
well in advance of the Holiday selling season. Accordingly, unfavorable economic
conditions  and/or  deviations  from  projected  demand for products  during the
fourth quarter could have a material adverse affect on the Company's  results of
operations  for the entire fiscal year.  During fiscal years 1998 and 1997,  the
Company's  total  revenues for the fourth quarter ended January 31 accounted for
more than 40% of total revenues for the fiscal year.

Legal Proceedings

         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.

Employees

         As of January  31,  1999,  the  Company  employed  approximately  1,300
associates,  approximately 60% of whom were full-time. The Company considers its
employee relations to be good.

                                                                               8

<PAGE>

Executive Officers of the Registrant

         Set forth below is a list of the executive officers of the Company,
together with brief biographical descriptions.

Name                                Position                                 Age
----                                --------                                 ---
Richard Thalheimer          Founder, Chairman of the Board,                   51
                            and Chief Executive Officer


Barry Gilbert               Vice Chairman,                                    48
                            Chief Operating Officer


Tracy Wan                   Executive Vice President,                         39
                            Chief Financial Officer,
                            and Corporate Secretary


Davia Kimmey                Senior Vice President,                            45
                            Marketing

Shannon King                Senior Vice President,                            43
                            Merchandising

Anthony Farrell             Senior Vice President,                            49
                            Creative


         Richard  Thalheimer is the founder of the Company and has served as the
Chief  Executive  Officer  and as a Director  of the  Company  since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.

         Barry Gilbert has been the Company's Vice Chairman and Chief  Operating
Officer since December 1996. Prior to joining the Company,  Mr. Gilbert was with
Warner  Bros.  Studio  Stores,  where he  served  as Senior  Vice  President  of
International  Franchise  Operations  from  1994 to  1996,  and as  Senior  Vice
President of Stores from 1990 to 1994.

          Tracy  Wan has been the  Company's  Executive  Vice  President,  Chief
Financial  Officer  since August 1998.  Ms. Wan served as Senior Vice  President
from February 1995 through August 1998, Vice President,  Chief Financial Officer
from September 1994 through  February 1995, as Vice  President,  Controller from
November 1991 through  September  1994, and as Controller from July 1989 through
November 1991. Ms. Wan is a certified public accountant.

         Davia Kimmey has been the Company's  Senior Vice  President,  Marketing
since June 1997. Prior to joining the Company,  Ms. Kimmey was with Spiegel Inc.
where she served as Corporate Vice President,  Advertising from 1995 to 1997 and
as Vice President, Advertising from 1992 to 1995.

         Shannon   King  has  been  the   Company's   Senior   Vice   President,
Merchandising,  since  February  1995.  Ms.  King served as the  Company's  Vice
President,  Merchandising from March 1993 through February 1995, and as Director
of Merchandising from July 1988 through March 1993.

         Anthony Farrell has been the Company's Senior Vice President,  Creative
Services,  since July,  1998.  Mr.  Farrell was a consultant to the Company from
April 1998 through July 1998. Prior to joining the Company, Mr. Farrell was with
SelfCare Catalog,  where he served as Senior Vice President,  Merchandising from
March 1991 through December 1997.

                                                                               9

<PAGE>

Factors Affecting Future Operating Results

         The provisions of the Private Securities  Litigation Reform Act of 1995
(the "Act"),  which became law in late December 1995,  provide  companies with a
"safe  harbor"  when  making  forward-looking  statements.  This  "safe  harbor"
encourages  companies to provide  prospective  information about their companies
without  fear of  litigation.  The Company  wishes to take  advantage of the new
"safe harbor"  provisions of the Act and is including this section in its Annual
Report on Form 10-K in order to do so. Statements that are not historical facts,
including  statements about  management's  expectations for fiscal year 1999 and
beyond,   are   forward-looking   statements  and  involve   various  risks  and
uncertainties.  Factors that could cause the Company's  actual results to differ
materially from management's projections,  forecasts, estimates and expectations
include, but are not limited to, the following:

We May Not Successfully Offer Attractive Merchandise to Our Customers

         In order to meet our strategic goals, we must  successfully  locate and
offer to our customers new,  innovative and high quality  products.  Our product
offerings must be affordable,  useful to the customer, well made, distinctive in
design,  and not widely available from other retailers.  We can not predict with
certainty that we will successfully  offer products that meet these requirements
in the future.

         If other retailers, especially department stores or discount retailers,
offer the same or similar  products to those we sell or if our  products  become
less popular with our customers, our sales may decline or we may decide to offer
our products at lower  prices.  If  customers  buy less of our products or if we
have to reduce our prices, our revenues and profits will decline.

         In addition,  we must offer our merchandise in sufficient quantities to
meet the demands of our customers and deliver this merchandise to customers in a
timely  manner.  We  must  be  able to  maintain  sufficient  inventory  levels,
particularly during peak selling seasons.  Our future results may be affected if
we are not successful in achieving these goals.

Our Quarterly  Operating  Results are Subject to  Significant  Fluctuations  and
Seasonality

         Our business is highly seasonal, reflecting the general pattern of peak
sales and  earnings  for the retail  industry  during the  Christmas  season.  A
substantial  portion of our total  revenues  and all or most of our net earnings
occur during our fourth quarter ending January 31. In  anticipation of increased
sales  activity  during  the fourth  quarter,  we incur  significant  additional
expenses,  including significantly higher inventory costs and the cost of hiring
a substantial  number of temporary  employees to supplement our permanent  store
staff. If for any reason our sales were to be substantially below those normally
expected  during the winter quarter of our fiscal year, our annual results would
be adversely  affected.  Due to this seasonality,  our operating results for any
one period may not be indicative  of our  operating  results for the full fiscal
year.

         Our  operating  results  during  the  other  quarters  of the  year are
generally lower and we have experienced  losses in such periods.  It is possible
that we may  experience  similar  losses  in the  future  in such  periods.  Our
quarterly  results of operations  may fluctuate  significantly  as a result of a
variety  of  factors,  including  among  other  things,  the timing of new store
openings,  net sales  contributed  by new  stores,  increases  or  decreases  in
comparable store sales, changes in our merchandise mix and net catalog sales.

         In addition,  like other retailers we typically make  merchandising and
purchasing  decisions  for the  Christmas  season well in advance of the holiday
selling season. As a result,  poor economic  conditions and/or  differences from
projected  customer  demand for our  products  during the fourth  quarter  could
result in lower  revenues.  During  our 1998 and 1997  fiscal  years,  our total
revenues for the fourth quarter ending January 31 accounted for more than 40% of
total revenues for the full fiscal year.

We May Not Successfully Design and Develop Proprietary Products

         We are  increasingly  dependent  on  the  success  of  the  proprietary
products that we have designed and developed for our  customers.  We must design
products that meet the demands of our customers and  manufacture  these products
cost-effectively.  In addition, we must rely on contracted manufacture resources
to produce these products in sufficient  quantities to meet customer  demand and
deliver these  products in a timely manner to our  customers.  We rely solely on
our contracted  manufacturers  to produce and timely  deliver these  proprietary
products.  If we are unable to successfully design,  develop, and timely deliver
our  proprietary  products,  our operating  results may be materially  adversely
affected.

                                                                              10
<PAGE>


We Face Certain Risks Associated with Expansion

     We plan to continue to increase  the number of Sharper  Image stores in the
future in order to grow our revenues.  Our ability to expand will depend in part
on the following factors:

     o   the availability of attractive store locations;
     o   our ability to negotiate favorable lease terms;
     o   our ability to identify customer demand in different geographies;
     o   general economic conditions; and
     o   the availability of sufficient funds for expansion.

     As we continue  to expand,  we have  started to and may  continue to become
concentrated in limited  geographic  areas.  This could increase our exposure to
customer demand, weather, competition,  distribution problems, and poor economic
conditions in these  regions.  In addition,  our catalog sales or existing store
sales in a specific region may decrease as a result of new store openings.

     In  order  to  continue  our  expansion,  we will  need to hire  additional
management and staff for our corporate offices and employees for each new store.
We must also expand our management  information systems and distribution systems
to serve these new stores. If we are unable to hire necessary  personnel or grow
our existing  systems,  our expansion efforts may not succeed and our operations
may suffer.

     Some of our expenses will increase with the opening of new stores. If store
sales  are  inadequate  to  support  these new  costs,  our  profitability  will
decrease.  For example,  inventory costs will increase as we increase  inventory
levels to fulfill additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our  current  credit  facility  to be used for new store  openings.
Furthermore,  our current  credit  facility has various  loan  covenants we must
comply with in order to maintain  the credit  facility.  We cannot  predict with
certainty that we will be successful in obtaining additional funds or new credit
facilities on favorable terms or at all.

We Are Dependent on the Success of our Advertising Efforts

         Our revenues  depend in part on our ability to  effectively  market and
advertise our products  through The Sharper Image catalog and other  advertising
vehicles. Increases in advertising, paper costs or postage may limit our ability
to advertise without reducing our profitability.  If we decrease our advertising
efforts due to increased  advertising costs or for any other reason,  our future
operating  results may be  materially  adversely  affected.  We are also testing
other  advertising  media such as  television  (infomericals)  and the Internet.
Expenditures  on these and other  media may not  produce a  sufficient  level of
sales to cover such expenditures, which would reduce our profitability.

We Rely on Our Catalog Operations

     Our success  depends in part on the success of our catalog  operations.  We
believe that successful  catalog operations will depend in part on the following
factors:

    o    the efficient targeting of our mailings;
    o    productive prospect mailing;
    o    appropriate shifts in our merchandise mix; and
    o    our ability to achieve adequate response rates to our mailings.

         Catalog  mailings  entail  substantial  paper,   postage,   merchandise
acquisition  and human resource costs,  including costs  associated with catalog
development and increased inventories.  We incur nearly all of these costs prior
to the mailing of each catalog. As a result, we are not able to adjust the costs
being  incurred in  connection  with a particular  mailing to reflect the actual
performance of the catalog. If we were to experience a significant  shortfall in
anticipated revenue from a particular mailing, and thereby not recover the costs
associated with that mailing, our future results would be adversely affected. In
addition, response rates to our mailings and, as a result, revenues generated by
each  mailing are  affected by factors  such as consumer  preferences,  economic
conditions,  the  timing  and  mix  of  catalog  mailings  and  changes  in  the
merchandise mix, several of which may be outside our control.  Further,  we have
historically  experienced  fluctuations  in the  response  rates to our  catalog
mailings.  If we are unable to accurately target the appropriate  segment of the
consumer  catalog  market  or to  achieve  adequate  response  rates,  we  could
experience  lower sales,  significant  markdowns or  write-offs of inventory and
lower margins, which would adversely affect our future results.


                                                                              11
<PAGE>


Our Catalog Operating Costs are Unpredictable

         Historically,  significant  portions  of our  revenues  have  been from
purchases  made by customers  from The Sharper Image  catalog.  Increases in the
costs of producing and distributing the catalog may reduce the  profitability of
our catalog sales.  Specifically,  we may experience increases in postage, paper
or shipping  costs due to factors  beyond our control.  As a result,  our future
results may be adversely affected.

         We maintain a contract with a major package carrier for the delivery of
our  merchandise.  There can be no assurance that, once this contract expires or
is  terminated,  we will be able to negotiate  similar or better terms with this
major carrier or another shipping company or that the resulting  contract(s)will
be on terms  favorable to us. Our inability to secure  suitable or  commercially
favorable  contracts for the delivery of our  merchandise  could have an adverse
effect on our future results.

Our New Business Lines and Internet Strategy May Not Succeed

         In the past we have tested new lines of  business  that have not always
proven profitable.  We continually examine and evaluate all revenue channels for
profitability.  We may  decide  to  develop  new  business  lines or to  acquire
additional  businesses in the future, and we cannot predict whether such efforts
will be successful. The failure of new business lines or acquisitions could hurt
future results.

         We believe that we need to reach our current customers and generate new
customers through methods other than regular catalog  mailings.  We are pursuing
opportunities  to sell our products  over the Internet  through our own web site
http://www.sharperimage.com  and  other  interactive  shopping  media  including
on-line computer networks such as America Online's  Shopping Channel,  Microsoft
Plaza, Yahoo Stores, Catalog City and PC World Shopping.  This is a new business
and marketing strategy for us and involves certain risks and  uncertainties.  We
may not succeed in achieving  profitable  operations  in marketing  our products
over the Internet.

We Depend on Our Vendors

         Our  performance  depends on our  ability to purchase  our  products in
sufficient  quantities at competitive prices and on our vendors' ability to make
and deliver high quality  products in a cost effective,  timely manner.  Some of
our smaller vendors have limited  resources,  production  capacities and limited
operating histories.  We have no long-term purchase contracts or other contracts
that provide continued supply,  pricing or access to new products and any vendor
or distributor could discontinue selling to us at any time. We cannot assure you
that we will be able to acquire the products we desire in sufficient  quantities
or on terms that are  acceptable  to us in the future.  In  addition,  we cannot
assure you that our vendors  will make and deliver  high  quality  products in a
cost effective,  timely manner.  We may also be unable to develop  relationships
with new  vendors.  Also all  products we purchase  from vendors in the Far East
must be shipped to our  distribution  centers by freight  carriers and we cannot
assure  you that we will be able to  obtain  sufficient  capacity  at  favorable
rates.  Our inability to acquire suitable  products in a cost effective,  timely
manner or the loss of one or more key vendors or freight  carriers  could have a
negative impact on our business.

We Face Certain Risks Relating to Customer Service

         Our ability to provide customer service depends,  to a large degree, on
the  efficient  and  uninterrupted   operation  of  our  two  call  centers  and
contracting  services with the third party call centers. Any material disruption
or slowdown  in our order  processing  systems  resulting  from labor  disputes,
telephone down times,  electrical outages,  mechanical problems,  human error or
accidents,  fire, natural disasters,  or comparable events could cause delays in
our ability to receive and distribute  orders and may cause orders to be lost or
to be shipped or delivered  late.  As a result,  customers  may cancel orders or
refuse to receive  goods on account of late  shipments,  which would result in a
reduction  of net sales and could mean  increased  administrative  and  shipping
costs.  We cannot  assure you that  telephone  call  volumes will not exceed our
present telephone system capacity. If this occurs, we could experience telephone
answer delays and delay in placing orders. Because our strategies depend in part
on  maintaining  our  reputation for superior  levels of customer  service,  any
impairment of our customer  service  reputation  could have an adverse effect on
our business.


                                                                              12
<PAGE>


We Face Risks Associated with Distribution

         We conduct all of our  distribution  operations  and all of our catalog
and Internet order  processing  fulfillment  functions from a single facility in
Little Rock, Arkansas.  We also use contract warehouse facilities for additional
seasonal  requirements.  Any  disruption in the  operations at the  distribution
center,  particularly during the Christmas season,  could have a negative impact
on our business.  In addition, we rely upon third party carriers for our product
shipments,  including  shipments to and from all of our stores.  As a result, we
are subject to certain risks,  including employee strikes and inclement weather,
associated with such carriers'  ability to provide delivery services to meet our
shipping needs. We are also dependent on temporary employees to adequately staff
our  distribution  facility,  particularly  during  busy  periods  such  as  the
Christmas season and while new stores are opening.  We cannot assure you that we
will continue to receive adequate  assistance from our temporary  employees,  or
that  we will  continue  to have  access  to  sufficient  sources  of  temporary
employees.

Results for Our Comparable Store Sales May Fluctuate

         Our  comparable  store  sales are  affected  by a variety  of  factors,
including, among others:

     o   customer demand in different geographies;
     o   our ability to efficiently source and distribute products;
     o   changes in our product mix;
     o   impact of competition; and
     o   general economic conditions.
    
         Our comparable  store sales have fluctuated  significantly  in the past
and we believe that such  fluctuations  may  continue.  Our historic  comparable
store net  sales  changes  were as  follows:

                                              Percentage
                 Fiscal Year                  Increase (Decrease)
                 -----------                  -------------------
                 1995                            3.3
                 1996                           (2.1)
                 1997                            1.1
                 1998                            5.3

These historic results are not necessarily  indicative of future results, and we
cannot assure you that our  comparable  store sales results will not decrease in
the future.  Any changes in our comparable  store sales results could impact our
future  operating  performance  and  cause  the  price  of the  common  stock to
fluctuate.

We Experience Intense Competition in Our Markets

         We operate in a highly competitive environment.  We principally compete
with a variety of department  stores,  sporting goods stores,  discount  stores,
specialty  retailers and other  catalogs that offer  products  similar to or the
same as our products. We may increasingly compete with major Internet retailers.
Many of our competitors are larger companies with greater financial resources, a
wider  selection of  merchandise  and a greater  inventory  availability.  If we
experience  increased  competition,  our business and operating results could be
adversely affected.

We May Fail to Anticipate and Adapt to Changing Consumer Trends

         Our  success  depends  on our  ability  to  anticipate  and  respond to
changing  product trends and consumer  demands in a timely manner.  Our products
must appeal to a broad range of consumers  whose  preferences  cannot  always be
predicted with  certainty and may change  between sales seasons.  If we misjudge
either the market for our  products or our  customers'  purchasing  habits,  our
sales may decline or we may be required  to sell our  products at lower  prices.
This would result in a negative impact on our business.

                                                                              13
<PAGE>

We May be Subject to State Sales and Use Tax or Internet Regulation

         Our  business  may be affected by the  adoption of new  regulations  or
rules  governing  the sale of our  products,  particularly  with regard to state
sales and use taxes.  Any  unfavorable  change in the state sales and use taxes,
which  affect our catalog and retail  store  sales  could  adversely  affect our
business  and results of  operations.  In  addition,  the Internet at present is
largely unregulated and we are unable to predict whether significant regulations
or taxes will be imposed on Internet  commerce in the near  future.  Because our
Internet  business is still in its initial stages,  we are unable to predict how
such regulations could affect the further development of our Internet business.

Poor Economic Conditions May Hurt Our Business

         Certain economic  conditions  affect the level of consumer  spending on
our products, including, among others, the following:

     o   general business conditions;
     o   interest rates;
     o   taxation; and
     o   consumer confidence in future economic conditions.

Our  business  could be  negatively  impacted  by a recession  or poor  economic
conditions and any related  decline in consumer demand for  discretionary  items
such as our products.  Because we purchase merchandise from foreign entities and
use  foreign  manufacturers  on  a  contract  basis  for  Sharper  Image  Design
proprietary  products and other private label products,  we are subject to risks
resulting from fluctuations in the economic conditions in foreign countries. The
majority of our foreign vendors and  manufacturers  are located in the Far East,
and as a result,  our  business may be  particularly  impacted by changes in the
political, social, legal, and economic conditions in the Far East. Additionally,
foreign weather and product transportation  problems could affect our ability to
maintain adequate inventory levels and adversely affect our future results.

We are Dependent on Certain Key Personnel

         Our success  depends to a significant  extent upon the abilities of our
senior management,  particularly Richard Thalheimer,  our founder, President and
Chief Executive  Officer.  The loss of the services of any of the members of our
senior  management or of certain  other key  employees  could have a significant
adverse effect on our business.  We maintain key man insurance on Mr. Thalheimer
in the amount of $15 million. In addition,  our performance will depend upon our
ability to attract  and retain  qualified  management,  merchandising  and sales
personnel.  There can be no assurance that Mr.  Thalheimer and the other members
of our existing management team will be able to manage our company or our growth
or that we will be ability to attract and hire additional qualified personnel as
needed in the future.

We are Controlled by a Single Stockholder

         As  of  April  15,  1999,  Richard  Thalheimer  will  beneficially  own
approximately  55.1% of all of the outstanding shares of the common stock of our
company.  As a result,  Mr.  Thalheimer  will  continue  to be able to elect the
entire Board of Directors and control the corporate actions of our company.

Our Common Stock Price is Volatile

         Our common  stock is quoted on the Nasdaq  National  Market,  which has
experienced  and is likely to  experience  in the future  significant  price and
volume  fluctuations,  which could  reduce the market  price of the common stock
without regard to our operating performance.  In addition, we believe that among
other factors,  any of the following factors could cause the price of the common
stock to fluctuate substantially:

     o quarterly fluctuations in our comparable store sales; 
     o announcements by other accessory and gift item  retailers;  
     o the trading volume of our common stock in the  public  market;  
     o general  economic  conditions;  and 
     o financial  market conditions.

                                                                              14

<PAGE>

Failure of Our Computer Systems to Recognize Year 2000 Could  Negatively  Affect
Our Business

         We recognize that the arrival of the year 2000 poses a unique worldwide
challenge  to the  ability of all  systems to  recognize  the date  change  from
December 31, 1999 to January 1, 2000. We have assessed our computer and business
processes  and we are  reprogramming  our computer  applications  to provide for
their continued  functionality.  We are currently assessing the readiness of our
vendors and other third parties with which we interface.

         We  are  presently  unable  to  assess  the  likelihood  that  we  will
experience  operational  problems due to unresolved  year 2000 problems of third
parties that we do business  with. We cannot assure you that other entities will
achieve  timely year 2000  compliance;  and if they do not,  year 2000  problems
could have an adverse impact on our operations. Where commercially reasonable to
do so, we intend to assess our risks with respect to failure by third parties to
be year 2000 compliant and to seek to mitigate those risks. If we cannot achieve
such  mitigation,  year  2000  problems  could  have an  adverse  impact  on our
operations.

         The estimated  cost for this project is between  $400,000 and $600,000,
and is being funded through  operating cash flows. We will incur operating costs
related to year 2000  compliance  projects  over  several  quarters  and we will
expense such costs as  incurred.  Through  January,31,  1999,  we have  incurred
approximately $300,000 on work related to year 2000 compliance.

     Our 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,  we cannot assure you 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 following:

     o  the availability and cost of personnel  trained in year 2000 remediation
        work;
     o  the ability to locate and correct all computer codes;
     o  our vendors and suppliers success in reaching year 2000 readiness; and
     o  the timely availability of necessary replacement items.

We presently believe that the most reasonably  likely worst-case  scenarios that
we might confront with respect to year 2000 issues have to do with third parties
not being year 2000 compliant.  We are presently  evaluating vendor and customer
compliance  and  will  develop  contingency  plans,  such  as  alternate  vendor
opportunities,  after  obtaining  compliance  evaluations.  We intend to develop
contingency plans by September 1999.

Merchandise Returns

         As part of our  customer  service  commitment,  we  maintain  a liberal
merchandise return policy, which allows customers to return most merchandise. As
with industry  practice,  we make  allowances for catalog sales in our financial
statements for anticipated merchandise returns based on historical return rates.
We cannot  assure  you that  actual  merchandise  returns  will not  exceed  our
allowances.  In addition,  because our allowances are based on historical return
rates,  we cannot assure you that the  introduction  of new  merchandise  in our
stores or catalogs, the opening of new stores, the introduction of new catalogs,
changes in the merchandise mix or other factors will not cause actual returns to
exceed return allowances.  Any significant  increase in merchandise returns that
exceed our allowances could adversely affect our future results.

Our Charter Documents and Delaware Law May Prohibit a Takeover

         We are a Delaware  corporation.  The Delaware  General  Corporation Law
contains  certain  provisions  that may make a change in control of our  company
more difficult or prevent the removal of incumbent directors.  In addition,  our
Certificate of Incorporation and Bylaws contain certain provisions that have the
same effect.  These  provisions  may have a negative  impact on the price of our
common  stock,  may  discourage  third-party  bidders  from making a bid for our
company or may reduce any premiums paid to shareholders for their common stock.

                                                                              15

<PAGE>


We must Successfully Respond to Changes in the Retail Industry

         The United States retail industry, and the specialty retail industry in
particular,  are dynamic by nature and have undergone  significant  changes over
the past several years.  The Company's  ability to anticipate  and  successfully
respond to continuing challenges is critical to achieving its expectations.

                                                                              16

<PAGE>

Item 2.  Properties

         The Company occupies  approximately  50,000 square feet of office space
for its corporate headquarters in San Francisco,  CA, under a lease scheduled to
expire  on  January  31,  2001,  with an option  to  extend  for two  additional
five-year periods.

         As of January  31,  1999,  the Company  operated  87 The Sharper  Image
stores under leases covering a total of approximately 202,000 square feet of net
selling space.

         The  Company's  operates a 110,000  square foot  distribution  facility
located in Little Rock, Arkansas.  All of the Company's  distribution  functions
are conducted  through this facility and other seasonally  occupied space rented
by the Company in close proximity thereto.

Item 3.  Legal Proceedings

         The Company is party to various  legal  proceeding  arising from normal
business activities.  In the opinion of management,  resolution of these matters
will not have a material adverse effect on the Company's  financial position and
results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

          None.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         The  information  set forth under "Note D --  Revolving  Loan and Notes
Payable" in the Notes to Financial Statements on page 21 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
27 of the Sharper  Image  Corporation  1998  Annual  Report to  Stockholders  is
incorporated herein by reference. As of April 15, 1999 there were 490 holders of
record of the Registrant's Common Stock.

Item 6.  Selected Financial Data

         The information set forth under the caption  "Financial  Highlights" on
page 3 of the Sharper Image  Corporation  1998 Annual Report to  Stockholders is
incorporated herein by reference.

Item 7.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial Condition

          The information set forth under the caption  "Management's  Discussion
and Analysis of Results of Operations and Financial Condition" on pages 10 to 15
of  the  Sharper  Image  Corporation  1998  Annual  Report  to  Stockholders  is
incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

           The  information  set  forth  under  the  caption  "Quantitative  and
Qualitative  Disclosure  About  Market  Risk" on pages 13 and 14 of the  Sharper
Image  Corporation 1998 Annual Report to Stockholders is incorporated  herein by
reference.

Item 8.  Financial Statements and Supplementary Data

          The financial statements and independent auditors' report set forth on
pages 16 through 27 of the  Sharper  Image  Corporation  1998  Annual  Report to
Stockholders are incorporated herein by reference.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

          None.


                                                                              17
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

         Information  with  respect  to  the  directors  of  the  Registrant  is
incorporated  herein by reference to the  Registrant's  1998 Proxy  Statement to
Stockholders, pages 3. Information with respect to the executive officers of the
Registrant is contained in Part I of this Annual Report on Form 10-K.

Item 11.  Executive Compensation

         Information  with respect to  executive  compensation  is  incorporated
herein by reference to the Registrant's 1999 Proxy Statement, pages 18 to 19.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         Information with respect to security ownership of beneficial owners and
management is incorporated  herein by reference to the  Registrant's  1998 Proxy
Statement, pages 16 to 17.

Item 13.  Certain Relationships and Related Transactions

         None.

Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a)1.     List of Financial Statements.

The  following  Financial  Statements  and Notes  thereto  set forth on pages 16
through 27 of the Sharper Image  Corporation  1998 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:

Independent Auditor's Report

Statements of Operations for the years ended January 31, 1999, 1998 and 1997.

Balance sheets at January 31, 1999 and 1998

Statements of  Stockholders'  Equity for the years ended January 31, 1999,  1998
and 1997

Statements of Cash Flows for the years ended January 31, 1999, 1998 and 1997

Notes to Financial Statements.

(a)2.     List of Financial Statement Schedule.

The following are filed as part of this Report:

Independent Auditors' Report on Schedule.

Schedule II - Valuation and Qualifying Accounts

          Schedules other than those listed are omitted for the reason that they
          are not required or are not applicable, or the required information is
          shown in the financial  statements or notes thereto,  contained in, or
          incorporated by reference into, this Report.


                                                                              18

<PAGE>


(b)       Reports on Form 8-K.

          No reports on Form 8-K were filed  with the  Securities  and  Exchange
Commission during the last quarter of the period covered by this Report.

          For the  purposes  of  complying  with  the  amendments  to the  rules
governing Form S-8  (effective  July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:

         Insofar as indemnification for liabilities arising under the Securities
         Act of 1933 may be  permitted  to  directors,  officers or  controlling
         persons of the  registrant  pursuant to the  foregoing  provisions,  or
         otherwise,  the  registrant has been advised that in the opinion of the
         Securities  and Exchange  Commission  such  indemnification  is against
         public  policy  as  expressed  in  the  1933  Act  and  is,  therefore,
         unenforceable.  In the event that a claim for  indemnification  against
         such  liabilities  (other  than the  payment by the  registrant  of the
         expenses incurred or paid by a director,  officer or controlling person
         of the  registrant  in the  successful  defense of any action,  suit or
         proceeding) is asserted by such director, officer or controlling person
         in  connection  with the  securities  being  registered on the Form S-8
         identified  below,  the registrant  will,  unless in the opinion of its
         counsel the matter has been settled by controlling precedent, submit to
         a  court  of  appropriate   jurisdiction   the  question  whether  such
         indemnification by it is against public policy as expressed in the 1933
         Act and will be governed by the final adjudication of such issue.

The preceding  undertaking  shall be incorporated by reference into registrant's
Registration Statement on Form S-8 (Registration No. 33-12755).

(c)      List of Exhibits.

          Incorporated  herein by reference is a list of the Exhibits  contained
in the Exhibit Index which begins on page 27 of this report.

                                                                              19

<PAGE>


                                   SIGNATURES

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

SHARPER IMAGE CORPORATION                SHARPER IMAGE CORPORATION


By: /s/ Richard J. Thalheimer            By: /s/ Tracy Y. Wan
        -----------------------              ------------------------
        Richard J. Thalheimer                    Tracy Y. Wan
        Chief Executive                          Executive Vice President,
        Officer, Chairman                        Chief Financial Officer
        (Principal Executive Officer)            (Principal Financial and
                                                 Accounting Officer)


                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below  constitutes  and appoints  Richard  Thalheimer and Tracy Wan, and each of
them, as such person's true and lawful  attorneys-in-fact  and agents, with full
power of substitution and  resubstitution,  for such person and in such person's
name,  place,  and  stead,  in any  and  all  capacities,  to  sign  any and all
amendments to this report, and to file the same, with all exhibits thereto,  and
other  documents  in  connection  therewith,  with the  Securities  and Exchange
Commission,  granting unto said  attorneys-in-fact and agents, and each of them,
full  power  and  authority  to do and  perform  each and  every  act and  thing
requisite  and  necessary to be done in  connection  therewith,  as fully to all
intents and  purposes as he might or could do in person,  hereby  ratifying  and
confirming all that said  attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes,  may lawfully do or cause to be done by virtue
hereof.

<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and in the
capacities and on the dates indicated.

<CAPTION>
Signature                           Title                                     Date
---------                           -----                                     ----
<S>                                 <C>                                 <C> 
/s/ Richard J. Thalheimer           Chief Executive                     April  28, 1999
----------------------------        Officer, Chairman
Richard J. Thalheimer               (Principal Executive Officer)



/s/ Tracy Y. Wan                    Executive Vice President,           April  28, 1999
----------------------------        Chief Financial Officer 
Tracy Y. Wan                        Corporate Secretary
                                    (Principal Financial and 
                                    Accounting Officer) 


/s/ Alan Thalheimer                 Director                            April  28, 1999
----------------------------
Alan Thalheimer


/s/ Maurice Gregg                   Director                            April  28, 1999
----------------------------
Maurice Gregg


/s/ Gerald Napier                   Director                            April  28, 1999
----------------------------
Gerald Napier


/s/ Morton David                    Director                            April  28, 1999
----------------------------
Morton David

</TABLE>

                                                                              20
<PAGE>

<TABLE>

                                                  SHARPER IMAGE CORPORATION

                                       SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                           --------------------------------------
                                                           ($000)

<CAPTION>
            COLUMN                                        COLUMN             COLUMN              COLUMN            COLUMN
               A                                             B                 C                    D                 E
----------------------------------------------------------------------------------------------------------------------------
                                                         Balance at         Additions                              Balance
                                                         Beginning         Charged to                             at End of
DESCRIPTION                                              of Period        Costs & Exp.         Deductions           Period
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                 <C>                 <C>   
INVENTORY

YEAR ENDED JANUARY 31, 1999:
----------------------------
Inventory Obsolescence                                    $1,486              $1,298              $  846              $1,938

YEAR ENDED JANUARY 31, 1998:
----------------------------
Inventory Obsolescence                                    $1,509              $  678              $  701              $1,486

YEAR ENDED JANUARY 31, 1997:
----------------------------
Inventory Obsolescence                                    $1,449              $1,681              $1,621              $1,509

OTHER

YEAR ENDED JANUARY 31, 1999:
----------------------------
Other                                                     $  508              $  830              $  534              $  804

YEAR ENDED JANUARY 31, 1998:
----------------------------
Other                                                     $  505              $  321              $  318              $  508

YEAR ENDED JANUARY 31, 1997:
----------------------------
Other                                                     $  461              $  351              $  307              $  505

</TABLE>


                                                                              21



<PAGE>


INDEPENDENT AUDITORS' REPORT ON SCHEDULE


Board of Directors and Stockholders of
  Sharper Image Corporation


We have audited the  financial  statements of Sharper  Image  Corporation  as of
January 31,  1999 and 1998 and for each of the three  years in the period  ended
January 31, 1999, and have issued our report thereon dated March 26, 1999;  such
financial  statements  and report are  included  in your 1998  Annual  Report to
Stockholders and are incorporated herein by reference.  Our audits also included
the financial  statement schedule of Sharper Image  Corporation,  listed in Item
14. This financial  statement  schedule is the  responsibility  of the Company's
management.  Our responsibility is to express an opinion based on our audits. In
our opinion,  such financial statement schedule,  whom considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.


/s/ Deloitte & Touche LLP


San Francisco, California
March 26, 1999


<PAGE>

                                  EXHIBIT INDEX

3.1      Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
         to Registration Statement on Form S-1 (Registration No. 33-12755).)

3.2      Bylaws.  (Incorporated  by  reference  to Exhibit  3.2 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.1     Amended and Restated Stock Option Plan.  (Incorporated  by reference to
         appendix to Proxy Statement for annual meeting to be held June 7, 1999)

10.2     1994 Non-Employee  Director Stock Option Plan dated October 7, 1994, as
         amended.  (Incorporated by reference to appendix to Proxy Statement for
         annual meeting to be held June 7, 1999)

10.3     Cash or Deferred  Profit  Sharing  Plan, as amended.  (Incorporated  by
         reference  to  Exhibit  10.2 to  Registration  Statement  on  Form  S-1
         (Registration No. 33-12755).)

10.4     Cash or Deferred Profit Sharing Plan Amendment No. 3.  (Incorporated by
         reference to Exhibit  10.15 to Form 10-K for fiscal year ended  January
         31, 1988.)

10.5     Cash or Deferred Profit Sharing Plan Amendment No. 4.  (Incorporated by
         reference to Exhibit  10.16 to Form 10-K for fiscal year ended  January
         31, 1988.)

10.6     Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
         of Common  Stock  purchased  pursuant to  exercise  of  employee  stock
         options.  (Incorporated  by reference  to Exhibit 10.3 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.7     Form of Stock  Purchase  Agreement  dated December 13, 1985 relating to
         shares of Common Stock purchase  pursuant to exercise of employee stock
         options.  (Incorporated  by reference  to Exhibit 10.4 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.8     Form of Stock  Purchase  Agreement  dated November 10, 1986 relating to
         shares of Common Stock purchased pursuant to exercise of employee stock
         options.  (Incorporated  by reference  to Exhibit 10.5 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.9     Form of Director Indemnification Agreement.  (Incorporated by reference
         to Exhibit 10.42 to  Registration  Statement on Form S-1  (Registration
         No. 33-12755).)

10.10    Real Estate  Installment  Note and Mortgage dated October 4, 1993 among
         the Company and Lee Thalheimer,  Trustee for the Alan Thalheimer Trust.
         (Incorporated  by  reference  to Exhibit  10.20 to Form 10-K for fiscal
         year ended January 31, 1994)

10.11    Financing  Agreement  dated  September 21, 1994 between the Company and
         CIT  Group/Business  Credit Inc.  (Incorporated by reference to Exhibit
         10.12 to Form 10-Q for the quarter ended October 31, 1994)

10.12    The Sharper  Image  401(K)Savings  Plan  (Incorporated  by reference to
         Exhibit 10.21 to Registration  Statement of Form S-8  (Registration No.
         33-80504) dated June 21, 1994))

10.13    Chief  Executive  Officer  Compensation  Plan dated  February  3, 1995.
         (Incorporated  by reference  to Exhibit  10.24 to the Form 10-K for the
         fiscal year ended January 31, 1995.)

10.14    Annual Report for the Sharper Image 401(K)  Savings Plan  (Incorporated
         by reference to Form 11-K (Registration No. 33-80504) for the plan year
         ended December 31, 1995.)

10.15    Split-Dollar  Agreement between the Company and Mr. R. Thalheimer,  its
         Chief Executive Officer dated October 13, 1995, effective as of May 17,
         1995  (Incorporated  by reference to Exhibit 10.17 to Form 10-K for the
         fiscal year ended January 31, 1996).

10.16    Assignments of Life Insurance Policy as Collateral,  both dated October
         13, 1995,  effective May 17, 1995 (Incorporated by reference to Exhibit
         10.18 to Form 10-K for the fiscal year ended January 31, 1996).


                                                                              22
<PAGE>

10.17    Amendment  to the  Financing  Agreement  dated May 15, 1996 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference to Exhibit 10.19 to the Form 10-Q for the quarter ended April
         30, 1996).

10.18    Warrant to Purchase  Common Stock  Agreement dated May 15, 1996 between
         the Company and The CIT  Group/Business  Credit Inc.  (Incorporated  by
         reference to Exhibit  10.20 to the Form 10Q for the quarter ended April
         30, 1996).

10.19    CAPEX Term Loan  Promissory  note dated  October 15,  1996  between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference  to  Exhibit  10.21 to the Form  10-Q for the  quarter  ended
         October 31, 1996).


10.20    Employment  Agreement  between the Company and Mr. Barry  Gilbert,  its
         Vice Chairman and Chief Operating Officer dated and effective  December
         2, 1996.  (Incorporated  by reference to Exhibit 10.20 to the Form 10-K
         for the year ended January 31, 1997).

10.21    Amendment to the Financing  Agreement  dated  February 13, 1997 between
         the Company and The CIT  Group/Business  Credit Inc.  (Incorporated  by
         reference to Exhibit  10.21 to the Form 10-K for the year ended January
         31, 1997).

10.22    Warrant to Purchase  Common  Stock  Agreement  dated  February 13, 1997
         between   the   Company   and  The  CIT   Group/Business   Credit  Inc.
         (Incorporated  by reference  to Exhibit  10.22 to the Form 10-K for the
         year ended January 31, 1997).

10.23    Amendment to the Financing  Agreement  dated March 24, 1997 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference to Exhibit  10.23 to the Form 10-K for the year ended January
         31, 1997).

10.24    Warrant to Purchase  Common Stock Agreement dated April 6, 1998 between
         the Company and The CIT  Group/Business  Credit Inc.  (Incorporated  by
         reference to Exhibit  10.24 to the Form 10-K for the year ended January
         31, 1998).

10.25    Amendment to the  Financing  Agreement  dated April 6, 1998 between the
         Company  and  The  Cit  Group/Business  Credit  Inc.  (Incorporated  by
         reference to Exhibit  10.25 to the Form 10-K for the year ended January
         31, 1998).

10.26    Amendment  to  Employment  Agreement  between the Company and Mr. Barry
         Gilbert,  its Vice  Chairman  and  Chief  Operating  Officer  dated and
         effective November 30, 1998.

11.1     Statement Re:  Computation of Earnings per Share.

13.1     1998 Annual Report to Stockholders.

23.1     Independent Auditors' Consent.

27.0     Financial Data Schedule.