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, 1998


                                       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 XX  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, 1998 was $8,430,160

   The number of shares of Common Stock, with $.01 par value, outstanding on
                      April 15, 1998 was 8,361,820 shares.


Documents incorporated by reference:

Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January  31, 1998 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 8, 1998 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 12  through  14,  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


         Sharper Image Corporation is a specialty  retailer which introduces and
sells quality,  innovative and  entertaining  products through The Sharper Image
stores,  monthly mail-order catalog,  Internet, and other marketing channels. In
the past year the Company  continued to test market a new  concept,  The Sharper
Image Home Collection. The Sharper Image Home Collection catalog had its initial
test  mailing in  January  1996 and the  Company  continued  to test  market the
concept through mail order during the year ended January 31, 1998 (fiscal 1997).

         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,
1998, the Company  operated 85 The Sharper Image stores in the United States and
licensees  operate 5 stores  internationally  and 2 airport stores in the United
States. The Company's  aggregate sales from its stores have grown  substantially
since the beginning of fiscal 1984 and have  increased from 3% of total revenues
in fiscal 1983 to 70% of total  revenues  for the fiscal year 1997.  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. The Company also has three additional retail formats, Sharper Image Design
stores,  Outlet stores and airport  shops.  These  formats are  discussed  under
"Store Operations" and "Licensed Operations".

         During  fiscal  1997,  the  Company  opened 4 new stores of The Sharper
Image  concept and format and converted 2 SPA  Collection  stores to The Sharper
Image concept.  Three  under-performing  Sharper Image stores were closed at the
maturity  of their  leases.  The  Company is  planning to open four to eight new
stores  during  the  fiscal  year  ending   January  31,  1999  (fiscal

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1998).  Management's  goal is to grow the  number of stores by 10% to 15% during
the next two fiscal years. However,  there can be no assurances that the Company
will meet this goal. See "Factors  Affecting  Future  Operating  Results." Lease
terms for certain of the  existing  The Sharper  Image store  locations  will be
maturing  during fiscal 1998 and such locations may be relocated or closed.  The
Company employs approximately 1,300 employees in twenty-eight states.

         In  addition  to serving as the  primary  advertising  vehicle  for the
Company's stores,  The Sharper Image Catalog,  including sales from the Internet
generated about 83% of its total  mail-order sales  (approximately  28% of total
revenues) in fiscal 1997. The monthly color catalog, which ranged from 44 to 124
pages in fiscal 1997, is recognized for creative  excellence  within the catalog
industry.  Worldwide, the Company mailed approximately 38 million of The Sharper
Image  Catalogs in fiscal 1997.  The Company  continued the test mailings of the
Sharper  Image Home  Collection  catalog  in fiscal  1997.  Management  plans to
continue to evaluate the potential of this concept during fiscal 1998.

         The  Company   believes  the  Internet  is  a  leading-edge   marketing
opportunity.   The  Sharper   Image   Catalog  is  on  the  World  Wide  Web  at
http://www.sharperimage.com.  While  this  sales  medium  is still in its  early
development,  the Company is encouraged  with the sales growth in the developing
electronic  marketplace  and  expects  to  continue  be a leader as this  market
continues its dynamic  growth.Other  electronic  media include America  Online's
Shopping  Channel  and  Microsoft  Plaza at  http://plaza.msn.com. See  "Factors
Affecting Future Operating Results".

         The  Company is known for its varied  product  mix and a  merchandising
philosophy   focusing  on  quality   products  which  are  unique,   innovative,
entertaining,  and useful that are developed by The Sharper Image,  exclusive to
The  Sharper  Image,  or in limited  distribution.  In product  lines  where the
Company  competes  directly  with other  retailers,  it chooses to sell the best
version of the product--maximizing features,  uniqueness, and value. The Company
is   frequently   sought  after  by   manufacturers   and  inventors  to  launch
technologically advanced and fun 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,  approximately
55% male, 45% female.


         In addition to its primary businesses,  The Sharper Image leverages its
name and reputation through a corporate  marketing  program,  wholesale sales of
Sharper Image brand products,  which included  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.


         During  fiscal  1997,  the  Company  continued  the  development  of an
in-house new product development  function along with a wholesale sales group to
market  its  proprietary  Sharper  Image  Design  products.  The  result  of the
increased  resources  devoted to Sharper Image Design  products was reflected in
the fourth quarter when a number of new products were introduced and contributed
to the fourth quarter  results.  Wholesale  sales  decreased  during fiscal 1997
primarily  as a result of a  decreased  number of product  offerings,  since the
majority of the

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<PAGE>

department  stores had made  commitment  for  holiday  merchandise  prior to our
introduction  of new Sharper Image Design product  offerings.

The Sharper Image Catalog/Retail Advertising

         The Sharper Image Catalog is a full-color  catalog that is mailed to an
average of approximately 2.6 million individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1997, the Company mailed  approximately 38 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 created 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
lead-time needed to produce the catalog. The monthly production and distribution
schedule permits frequent changes in the product selection.  During fiscal 1997,
The Sharper Image Catalog  typically  contained from 44 to 76 pages for non-peak
months and  between 84 and 124 pages for the peak  seasons of  Father's  Day and
Christmas. In October 1996, the Company re-designed The Sharper Image catalog to
update the look of the catalog to distinguish  the Company from other  specialty
retailers. The Company continued this new format in fiscal 1997. The new catalog
design uses dramatic visuals and humorous and clever product  descriptions.  The
new catalog  design  features  products more  prominently,  but includes a fewer
number of products,  which ranged  between 210 to 250 products  during the first
three  quarters  of the year,  increasing  to 340  products  during  the  fourth
quarter.

         During  fiscal  1997,  the Company  also  utilized  newspaper,  leading
consumer magazine and airline magazine inserts to advertise  specific  products.
The  Company  believes  these  advertisements  generate  store  sales as well as
mail-order  sales.  The  Company  plans to  continue  them in  fiscal  1998.  In
addition,  from time to time,  the Company has also produced  certain  specialty
catalogs  to test new catalog  concepts.  To enhance  the  effectiveness  of the
catalog,  the Company's  in-house  staff  utilizes  statistical  evaluation  and
selection  techniques to determine  which segments of the in-house  mailing list
are likely to contribute the greatest  revenue per mailing.  This evaluation has
provided  the  Company  with the  ability to  quickly  increase  circulation  to
responsive  segments and to scale back  circulation to  non-responsive  segments
thus reducing the effective cost of advertising.

         During fiscal 1997, the Company continued to mail test catalogs for The
Sharper  Image Home  Collection  concept.  This catalog  features  high quality,
luxury home  furnishings  and  accessories.  The  Company  mailed over 6 million
Sharper Image Home Collection  catalogs during fiscal 1997. The Company plans to
continue to test this concept during fiscal 1998.

         The  Company   collects   customer   names   through   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 useful to assess
the effectiveness of the catalog as a form of retail advertising,  identify what
new customers can be added to the in-house  mailing list without the traditional
list  rental  "prospecting"  costs,  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

                                                                               4
<PAGE>

mails promotional material to these best customers, which is designed to produce
incremental sales.


Store Operations

         The Sharper  Image  stores are  located  throughout  the United  States
generally in downtown financial districts and business centers, upscale shopping
malls or drive-up suburban locations, all of which are areas that typically have
a high population density.


         Each store is generally  staffed with  approximately  6 to 8 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  frequently  technically  oriented items 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  in San Francisco to  standardize,  where  possible,
layout 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  $300,000 to $500,000.  Initial inventory for a
new Sharper Image store has generally cost approximately $250,000. 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 store 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  1997,  the
Company had 74 The Sharper Image stores,  8 Sharper Image Design  stores,  and 3
outlet locations.

         The Company has  retained a leading  design firm to update the look and
appeal of its retail  stores.  The Company  plans to test at least one prototype
store during fiscal 1998.

Internet Operations

         The Sharper Image was one of the first specialty retailers to enter the
world of electronic  commerce.  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. The Company's revenue from its Internet
catalog has doubled for each of the last two years.  The Company  believes  that
the  experience  it has gained is a  strategic  advantage.  Online  shopping  is
forecasted  to grow  from $2  billion  in 1997 to $12  billion  in the year 2000
according  to  the  Forrester  Report.  The  Company  believes  that  one of the
advantages of the Internet is the ability to introduce and/or market merchandise
at a low cost.  The Company  can present a full  spectrum of styles or models at
reasonable cost,  especially compared to the high cost of a similar presentation
in The Sharper  Image  catalog.  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 including
AOL and Apple  Computer.  In addition,  the Company

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leverages its experience in order  processing,  fulfillment and customer service
gained in over 20 years of mail order catalog operations.



Merchandising, Product Selection and Development


         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
pre-selected items which represent quality,  innovation,  and entertainment,  as
distinguished  from offering broad assortments of categories of merchandise.  As
individual items come to market or are developed internally by the Company which
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 a  narrower
assortment  in its stores and  catalogs.  The Company  offers  products at price
levels  ranging from $10 to over $5,000.  The Company  intends to keep expanding
the  offering  of  products  in the $50 to $500  price  range to  appeal  to the
Company's customer base. The Company also intends to continue to develop Sharper
Image Design proprietary and  private-labeled  products to utilize its marketing
knowledge built from 20 years of retailing  experience.  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.  Products  may also be  subject  to other  imitations.  See
"Factors Affecting Future Operating Results".

         The process of finding  new  products  involves  the  Company's  buyers
reviewing voluminous product literature,  traveling  extensively  throughout the
United  States,  Europe 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".


         In addition to finding new products from outside sources, the Company's
new product  development  group  develops  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 productivity.  Successful product  introductions during
the past two years  include the Turbo  Groomer,  Truth.Seeker,  Ionic Hair Wand,
Stereo Sound  Soother,  Memo Manager  Professional,  Shower  Companion,  and the
portable Sound Soother.

         The Company  believes that this new 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 and catalog and enhancing its
brand name  extension.  The  Company's  goal is to  significantly  increase  the
proportionate  sales and margin  contribution from these  proprietary  products.
However,  there is no  assurance  that the Company  will be able to continue the
growth

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of gross  margin  and the  proportionate  sales  related  to  these  proprietary
products. See "Factors Affecting Future Operating Results".

         The Company  purchases  merchandise  from numerous foreign and domestic
manufacturers and importers.  None of the suppliers  accounted for more than 10%
of the dollar  amount of the  Company's  purchases  during  fiscal 1997.  Of the
products  offered by the  Company  in recent  catalogs,  approximately  66% were
manufactured in the Far East,  approximately  24% were  manufactured  within the
United States,  approximately 6% were manufactured in Europe,  and approximately
4% were manufactured in Mexico and Canada. The Company expects these percentages
to vary as new products are introduced.  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.  Delivery  lead-time is
generally  in  the  range  of  12  to  18  months.   However,   certain  product
introductions may require longer lead time.

         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 based on the "just-in-time"  inventory management concept.  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 planners and merchandising managers who are responsible
for allocating inventory to stores.


Corporate Marketing


         During fiscal 1997, the Company's Corporate Marketing results 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  customers  utilizing The Sharper
Image  stores and catalog as the primary  means of offering and  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  will  continue  to  grow  this  area of its
business.


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Wholesale Operations


          The  Company's  Business  Development  department is the primary group
responsible for marketing to other retailers,  including fine department  stores
domestically  as well as  retailers  in  other  countries.  This  group's  sales
decreased from about $4.0 million in fiscal 1996 to about $3.2 million in fiscal
1997. The wholesale sales decreased  during fiscal 1997 primarily as result of a
decreased  number of products.  The majority of the  department  stores had made
commitments for holiday merchandise prior to our introduction of a number of new
Sharper Image Design  products in the fourth  quarter of fiscal 1997.  Plans for
this group are to continue to increase the number of wholesale  customers in the
U.S. and abroad, and the number of Sharper Image brand products offered to these
customers.  Negotiations to add other major department  stores are on-going.  By
choosing to feature Sharper Image brand products,  these fine department  stores
can sell proven products with positive sales appeal.


Licensed Operations


          The Company has exclusive licensing agreements in Japan,  Switzerland,
South Korea,  Australia 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  five Sharper Image retail stores  operated by the foreign  licensees,
two in Australia,  one each in Switzerland,  Korea and Saudi Arabia. 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.


Product Licensing/The Sharper Image Trademark

          The  Company  also  has  product   license   agreements  with  various
businesses.  The Company  controls  the  selection of the  licensees  and retail
distribution  channels  for the  products  in  order  to  maintain  the  quality
associated  with The Sharper  Image name.  Under each of these  agreements,  the
licensee is granted the right to use the trademarked  name, "The Sharper Image,"
in  connection  with  the  manufacture   and  sale  of  certain   products.   In
consideration  for the rights  granted to the  licensee,  the  Company  receives
royalties on the licensees' net sales,  subject, in certain cases, to a periodic
minimum  royalty.   The  Company  believes  that  product   licensing   presents
opportunities  to further  leverage  the value of The  Sharper  Image as a brand
name.

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

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<PAGE>


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 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's  Customer  Service group is also responsible for
resolving   customer   problems   promptly  and  to  the   customer's   complete
satisfaction. The Company is committed to provide courteous,  knowledgeable, and
prompt service to its customers.


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  customer 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.  In fiscal 1996,  the Company  established  a  telemarketing
center  located  at  the  Little  Rock  distribution  facility  to  augment  the
telemarketing team at the corporate offices.


          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 its computer systems and information
technology in connection with providing  additional and improved  management and
financial information.  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 variety of department stores, sporting goods stores,
discount  stores,  specialty

                                                                               9
<PAGE>

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.  The Company  offers
competitive pricing where other retailers market certain products similar 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 both the catalog and stores,
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 is also  testing  additional  retail
concepts in its efforts to grow revenues and net earnings in the long-term.


Trademark Licenses


          In the opinion of management,  the Company's  registered  service mark
and  trademark,  "The  Sharper  Image",  and the  name  recognition  that it has
developed,  is 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, Australia, Korea
and Saudi Arabia 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.


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 the fiscal years 1997 and 1996,
the Company's total revenues for the fourth quarter  accounted for more than 40%
of total revenues.


                                                                              10
<PAGE>

Employees

         As of January  31,  1998,  the  Company  employed  approximately  1,300
associates,  approximately 60% of whom were full-time. The Company considers its
employee relations to be good.


Executive Officers

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


Name                                Position                            Age
----                                --------                            ---
Richard Thalheimer          Founder,                                     50
                              Chairman of the Board, and             
                              Chief Executive Officer                
                                                                     
Barry Gilbert               Vice Chairman,                               47
                              Chief Operating Officer                
                                                                     
Davia Kimmey                Senior Vice President,                       44
                              Marketing                              
                                                                     
                                                                     
Shannon King                Senior Vice President,                       42
                              Merchandising                          
                                                                     
                                                                     
Tracy Wan                   Senior Vice President,                       38
                              Chief Financial Officer,     
                              and Corporate Secretary


         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.


         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.

                                                                              11
<PAGE>

         Tracy Wan has been the Company's Senior Vice President, Chief Financial
Officer since February 1995. Ms. Wan served as 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.

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 1998 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:


(a)      The ability to offer an attractive selection of merchandise,  including
         the  ability  to locate  and offer new,  innovative,  and high  quality
         products that satisfy its customers' demands and to acquire merchandise
         in sufficient quantities and on a timely basis.

(b)      The ability to design and develop proprietary products that satisfy its
         customers'   demands   and   to   have   such   products   manufactured
         cost-effectively  and in  sufficient  quantities  and  delivered to the
         Company on a timely basis.

(c)      The ability to successfully open new stores, which depends on a variety
         of factors,  including,  without limitation,  the identification of new
         markets with sufficient customer demand, the selection and availability
         of suitable locations,  the negotiation of acceptable store leases, the
         ability  to hire  and  train  additional  store  management  and  sales
         associates,  and the  availability  of adequate  capital  resources  on
         acceptable terms.

(d)      The ability to successfully and  cost-effectively  advertise and market
         its products  through The Sharper Image  catalog and other  advertising
         vehicles,  including new media such as television shopping services and
         the Internet.

(e)      Future increases in postage,  paper or shipping costs that increase the
         cost  of  producing  and   distributing   the  Company's   catalogs  or
         merchandise.

(f)      The success of new  businesses  that the Company may either  develop or
         acquire from time to time.  In late fiscal  1996,  the Company made the
         decision to close its SPA  Collection  division as a result of its lack
         of profitability and anticipated future performance.

(g)      The  highly   seasonal   nature  of  the   Company's   business  -  See
         "Seasonality".

(h)      Changes in merchandise mix.

                                                                              12
<PAGE>

(i)      The ability to maintain  sufficient  inventory  levels of its products,
         particularly during peak selling seasons.

(j)      The ability to compete  effectively in the Company's highly competitive
         industry with existing and  potential  competitors,  many of which have
         substantially greater financial and other resources than the Company.

(k)      Changes in consumer  preferences  and customer demand for the Company's
         products,  which  fluctuate  based on a variety of factors,  including,
         without  limitation,  general  or  local  economic  conditions,  buying
         trends, and the retail sales environment.

(l)      Changes in general or local economic  conditions,  including conditions
         affecting the level of consumer spending on merchandise  offered by the
         Company and the general demand for products of stores located  adjacent
         to the Company's stores, particularly in malls.

(m)      The political,  social,  legal and economic risks in foreign  countries
         where the Company  purchases a significant  amount of merchandise  from
         foreign vendors.

(n)      Fluctuations in comparable  store sales results,  which have fluctuated
         significantly and have decreased in the past from period to period.

(o)      The ability to hire and retain the services of management and other key
         employees,  particularly  its  senior  management,  including,  without
         limitation,  Richard  Thalheimer,  the Company's Founder,  Chairman and
         Chief Executive Officer.

(p)      Any significant increase in merchandise returns.

(q)      The quality of merchandise purchased by the Company.

(r)      The ability of the Company's  single  distribution  facility located in
         Little Rock, Arkansas to distribute the Company's inventory merchandise
         to its stores and customers on a  cost-effective  and timely basis, and
         the  ability to  provide  superior  customer  service  and  efficiently
         fulfill customer orders. A disruption in operations of the distribution
         facility may significantly increase the Company's distribution costs.

(s)      The ability to have its merchandise  manufactured  and delivered by the
         Company's vendors and  manufacturers in sufficient  quantities and on a
         cost-effective and timely basis.

(t)      Changes in the availability of capital  expenditure and working capital
         financing, including the availability of long-term financing to support
         development of retail stores.

(u)      The imposition of new restrictions or regulations regarding the sale of
         the  Company's  products  or  changes  in  tax  rules  and  regulations
         applicable to the Company,  particularly with regard to state sales and
         use taxes.

(v)      Adverse results in significant litigation matters.

         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

                                                                              13
<PAGE>

Company's   ability  to  anticipate  and  successfully   respond  to  continuing
challenges is critical to achieving its expectations.

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.


         The Company currently operates 85 The Sharper Image stores under leases
covering a total of approximately 193,000 square feet of net selling space.

         The Company's  operates an 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 condition.

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 22 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
27 of the Sharper  Image  Corporation  1997  Annual  Report to  Stockholders  is
incorporated herein by reference. As of April 15, 1998 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  1997 Annual Report to  Stockholders is
incorporated herein by reference.


                                                                              14
<PAGE>


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 11 to 15
of  the  Sharper  Image  Corporation  1997  Annual  Report  to  Stockholders  is
incorporated herein by reference.



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk


           Not currently applicable


Item 8.  Financial Statements and Supplementary Data


          The financial statements and independent auditors' report set forth on
pages 16 through 26 of the  Sharper  Image  Corporation  1997  Annual  Report to
Stockholders are incorporated herein by reference.



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

          None.

                                    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 2 through 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 1998 Proxy Statement, pages 6 to 7.



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 4 to 5.


Item 13.  Certain Relationships and Related Transactions

          None.

                                                                              15
<PAGE>



                                     PART IV

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 17
through 27 of the Sharper Image  Corporation  1997 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, 1998, 1997 and 1996.

Balance sheets at January 31, 1998 and 1997

Statements of  Stockholders'  Equity for the years ended January 31, 1998,  1997
and 1996.

Statements of Cash Flows for the years ended January 31, 1998, 1997 and 1996.


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

Financial Data Schedule

         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.

(a)3.     List of Exhibits.

         Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index which begins on page 21 of this report.

(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:

                                                                              16
<PAGE>

         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).


                                                                              17
<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                                       Senior 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, 1998
----------------------------          Officer, Chairman             
Richard J. Thalheimer                 (Principal Executive Officer) 


/s/ Tracy Y. Wan                    Senior Vice President,              April  28, 1998
----------------------------          Chief Financial Officer                                                                      
Tracy Y. Wan                          Corporate Secretary                                 
                                      (Principal Financial and
                                       Accounting Officer)        


/s/ Elyse Eng Thalheimer            Director                            April  28, 1998
----------------------------                                                           
Elyse Eng Thalheimer

                                                                             18
<PAGE>

/s/ Alan Thalheimer                 Director                            April  28, 1998
----------------------------
Alan Thalheimer


/s/ Maurice Gregg                   Director                            April  28, 1998
----------------------------
Maurice Gregg


/s/ Gerald Napier                   Director                            April  28, 1998
----------------------------
Gerald Napier


/s/ Morton David                    Director                            April  28, 1998
----------------------------
Morton David

</TABLE>


                                                                              19
<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, 1998:
----------------------------
Inventory Obsolescence                                               $1,509             $  678             $  701           $1,486

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

YEAR ENDED JANUARY 31, 1996:
----------------------------
Inventory Obsolescence                                               $  891             $2,109             $1,551           $1,449


OTHER

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

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

YEAR ENDED JANUARY 31, 1996:
----------------------------
Other                                                                $  291             $  462             $  292           $  461

</TABLE>
                                                                              20

<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
         Registration   Statement   on  Form  S-8  filed  on  January  19,  1996
         (Registration No. 33-3327).)

10.2     1994  Non-Employee  Director  Stock Option Plan dated  October 7, 1994.
         (Incorporated by reference to Registration  Statement on Form S-8 filed
         on January 19, 1996 (Registration No. 33-3327).)

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)

                                                                              21
<PAGE>


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).

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.

10.21    Amendment to the Financing  Agreement  dated  February 13, 1997 between
         the Company and The CIT Group/Business Credit Inc.

10.22    Warrant to Purchase  Common  Stock  Agreement  dated  February 13, 1997
         between the Company and The CIT Group/Business Credit Inc.

10.23    Amendment to the Financing  Agreement  dated March 24, 1997 between the
         Company and The CIT Group/Business Credit Inc.

10.24    Warrant to Purchase  Common Stock Agreement dated April 6, 1998 between
         the Company and The CIT Group/Business Credit Inc.

10.25    Amendment to the  Financing  Agreement  dated April 6, 1998 between the
         Company and The Cit Group/Business Credit Inc.


11.1     Statement Re: Computation of Earnings per Share.

13.1     1997 Annual Report to Stockholders.

                                                                              22
<PAGE>

23.1     Independent Auditor's Consent.

27.0     Financial Data Schedule.

                                                                              23

<PAGE>


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

Results Of Operations                    Fiscal Year Ended January 31,
                                 -----------------------------------------------
                                       1998            1997             1996
Percentage of Total Revenues      (Fiscal 1997)   (Fiscal 1996)    (Fiscal 1995)
--------------------------------------------------------------------------------
Revenues:
  Net store sales                      69.9%            71.0%            71.1%
  Net catalog sales                    27.8             25.9             26.6
  Net wholesale sales                   1.5              1.9              1.5
  List rental                           0.5              0.6              0.5
  Licensing                             0.3              0.6              0.3
                                      -----            -----            -----
Total Revenues                        100.0            100.0            100.0

Costs and Expenses:
  Cost of products                     53.3             51.8             50.3
  Buying and occupancy                 11.0             11.4             10.5
  Advertising and promotion            10.5             12.2             15.5
  General, selling, and
    administrative                     24.5             24.1             23.5
  Provision for loss due to closure
    of SPA Collection division          --               3.8              --
                                      -----            -----            -----
Operating Income (Loss)                 0.7             (3.3)             0.2
Other Income (Expense)                 (0.2)            (0.2)             0.2
                                      -----            -----            -----
Earnings (Loss) Before Income Tax 
  (Benefit)                             0.5             (3.5)             0.4
Income Tax (Benefit)                    0.2             (1.4)             0.2
                                      -----            -----            -----
Net Earnings (Loss)                     0.3%            (2.1)%            0.2%
                                      =====            =====            =====


Revenues

                                               Fiscal Year Ended
                                    --------------------------------------------
                                     Jan. 31,        Jan. 31,         Jan. 31,
                                       1998            1997             1996
--------------------------------------------------------------------------------
Dollars in thousands              (Fiscal 1997)   (Fiscal 1996)    (Fiscal 1995)

Net store sales                      $151,589        $149,321        $145,095
Net catalog sales                      60,405          54,420          54,160
Net wholesale sales                     3,199           4,029           3,145
                                     --------        --------        --------
Total Net Sales                       215,193         207,770         202,400

List rental                               982           1,177           1,102
Licensing                                 640           1,298             682
                                     --------        --------        --------
Total Revenues                       $216,815        $210,245        $204,184
                                     ========        ========        ========


Net sales of $215,193,000  for fiscal 1997 increased  $7,423,000,  or 3.6%, from
the prior  fiscal year.  Returns and  allowances  as a percentage  of sales were
12.2% for fiscal  1997,  compared  to 12.3% for  fiscal  1996.  Net store  sales
increased  $2,268,000,  or 1.5%,  comparable  store sales  increased  1.1%,  net
catalog sales increased $5,985,000,  or 11.0%, and net wholesale sales decreased
$830,000, or 20.6%, as compared to fiscal 1996.

The increase in net store sales for fiscal 1997 was  primarily  attributable  to
the  addition of six stores  opened  during the year.  The increase in net store
sales also reflected a 7.2% increase in average revenue per transaction, to $104
from $97, and a 4.6% decrease in total store transactions. Net sales per average
square foot were $465 for fiscal 1997, compared to $458 in fiscal 1996, and $473
in fiscal 1995. Sharper Image stores' sales productivity compares favorably with
the retail  industry's  specialty  store (hard goods) average of $343 for fiscal
1996,  $252 for fiscal 1995, and $234 for fiscal 1994  (statistical  information
for 1997 is not yet available).  Strong comparable store sales increases of 7.3%
and 3.4% in the third and fourth  quarters  of fiscal  1997 more than offset the
comparable  store  sales  decreases  in the first  half of the year.  Management
believes the  increase in net sales  benefited  from new product  introductions,
including an increased  selection of Sharper Image Design  proprietary  products
and more optimal inventory levels during the second half of the year.

                                       11

<PAGE>


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


Revenues (continued)

     Net catalog sales were positively  impacted by an increase in Sharper Image
catalog  average revenue per order to $158 from $134,  advertising  campaigns in
major  consumer  magazines  and  newspapers,  a 10.0%  increase in the number of
Sharper  Image  catalogs  circulated,  and a two-fold  increase in the number of
catalogs  circulated  for the test concept  Sharper Image Home  Collection.  The
Company  believes  that the increase in the number of catalogs and catalog pages
circulated for the Sharper Image catalog during fiscal 1997 also  contributed to
the increases in net store sales and comparable store sales.

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

     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%.

     The increase in net store 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 net store sales  increase  also  reflected a 9.8%
increase in total store transactions,  partially offset by a decrease in average
revenue per order from $106 to $97. 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 believed the successful quarter was primarily fueled by
the  introduction  of several key new  products,  as well as a 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
for the Sharper  Image  catalog to $134 from $122,  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 $884,000, or 28.1%, primarily due to the increase
in the number of wholesale customers both in the U.S. and internationally.

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


Cost of Products

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

     Cost of products increased $6,071,000, or 5.9% , in fiscal 1996 from fiscal
1995. This increase primarily reflected the increase in cost of products 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 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
proprietary products and fitness equipment.

     The  Company's  gross  margin  rate  fluctuates  with  the  changes  in its
merchandise mix, which is affected by new items available in various categories.
The  variation in  merchandise  mix from  category to category from year to year
reflects the characteristic  that the Company is driven by individual  products,
as opposed to general lines of  merchandise.  It is impossible to predict future
gross  margin  rates.  The  Company's  goal is to increase the number of Sharper
Image Design  proprietary  products and other exclusive  private label products,
and the related sales.  This goal, if met,  should have a positive impact on the
Company's gross margin rate.

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


Buying and Occupancy

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

     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 ten new stores opened in fiscal 1995.


Advertising and Promotion

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

     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,  and the  advertising  campaign  initiated  during the fourth
quarter in major  consumer  magazines  and  newspapers  designed  to attract new
customers. The Company began to receive rate decreases in paper costs during the
second quarter of fiscal 1996,  which had a favorable impact on costs for fiscal
1996 as compared to fiscal 1995.

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


General, Selling, and Administrative

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

     G S & 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 G S & A expenses was an increase
in net delivery expense related to mail order shipments.


Other Income (Expense)

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

     Net other expense for fiscal 1996 increased  $692,000 from fiscal 1995. The
increase in other  expense is primarily  due to an increase in interest  expense
related to  borrowings  on the  Company's  credit  facility  and a  decrease  in
interest income from available cash.


Income Taxes

     The  effective  tax rate for fiscal 1997 and fiscal 1996 was 40.0%.  Income
taxes are accounted for using an asset and liability  approach that requires the
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences of events that have been  recognized in the Company's  consolidated
financial statements or tax returns. In estimating future tax consequences,  all
expected  future  events then known to  management  are  considered,  other than
changes in the tax law or rates.
<PAGE>


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


Liquidity and Capital Resources

     At January 31, 1998, the Company had cash and equivalents of $3,501,000,  a
decrease of $7,372,000,  as compared to $10,873,000 at January 31, 1997.  During
fiscal  1997,  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  reflected the
outlay to bring  inventories  to an optimal level and the property and equipment
expenditures  related to new  stores.  At January 31,  1998,  the Company had no
amounts  outstanding on its revolving loan credit facility.  There was a capital
expenditure term loan outstanding of $1,167,000  included in notes payable.  The
highest amount of direct  borrowings  under the revolving  loan credit  facility
during fiscal 1997 was  $14,672,000,  compared with  $11,711,000 in fiscal 1996.
Letter of credit  commitments  outstanding  at  January  31,  1998 and 1997 were
$2,321,000 and $1,285,000, respectively.

     The  Company  has  a  revolving   secured  credit  facility  with  The  CIT
Group/Business  Credit,  Inc., which expires September 2001. The credit facility
has been amended on several occasions and, as of January 31, 1998, the agreement
allows  the  Company  borrowings  and  letters  of credit up to a maximum of $25
million for the period from October 1, 1997 through  December 31, 1997,  and $20
million  for other  times of the year  based on  inventory  levels.  The  credit
facility is secured by the Company's  inventory,  accounts  receivable,  general
intangibles  and certain  other  assets.  Borrowings  under this  facility  bear
interest at either  prime plus 0.75% 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 and
contains  limitations on operating leases,  other borrowings,  dividend payments
and stock repurchases. For the period ended January 31, 1998, the Company was in
compliance  with all  covenants.  For the period  ended  January 31,  1997,  the
Company was out of compliance  with the working capital and fixed asset coverage
ratios as a result of the closure of the SPA  Collection  division.  The Company
received waivers for such non-compliance.

     Subsequent  to January 31, 1998,  an  amendment to the credit  facility was
completed  to set lower  interest  rates  based on  performance,  to provide for
additional  seasonal  borrowings and to extend the expiration to September 2003.
Borrowings under the credit facility will now bear interest at either prime plus
0.50% per annum or at LIBOR  plus  2.50% per  annum.  The  credit  facility  was
seasonally increased as follows:

     October 1 through December 31,

     1998     $28 million
     1999     $30 million
     2000     $31 million
     2001     $32 million
     2002     $33 million

     In  addition,  the credit  facility  provides  for term  loans for  capital
expenditures  (Term Loans) up to an aggregate of $4.5 million.  Amounts borrowed
under the Term Loans bear  interest at a variable  rate of either  prime plus 1%
per annum or at LIBOR  plus 3% per  annum.  Each Term Loan is to be repaid in 36
equal  monthly  principal  installments.  Subsequent  to January 31,  1998,  the
variable  interest  rate for all Term  Loans was  lowered to prime plus 0.75% or
LIBOR plus 2.75%.  Notes payable  included a Term Loan which bears interest at a
variable rate of prime plus 0.75%,  provides for monthly  principal  payments of
$55,555 plus the related interest payment, and matures in October 1999.

     Notes payable also 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 8.4%,  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.

     The Company's  merchandise  inventory at January 31, 1998 was approximately
26.2% higher than the prior fiscal year. The increase in inventory reflected the
incremental  amounts  for the support of six new stores  opened  during 1997 and
increases to bring  inventory to an optimal  level to support  store and catalog
sales.

     The Company  leases all of its  offices,  stores,  and  seasonal  warehouse
space. The Company opened four Sharper Image

<PAGE>


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


stores   located  in  Denver,   Colorado;   Bloomington,   Minnesota;   Danbury,
Connecticut;  and Aventura,  Florida; and converted two SPA Collection stores in
Walnut Creek,  California,  and Skokie,  Illinois,  to Sharper Image stores. The
Company closed three Sharper Image stores located in Washington,  D.C.;  Novato,
California;  and Baltimore,  Maryland;  and three SPA  Collection  stores in St.
Louis, Missouri; Troy, Michigan; and Beverly Hills, California.

     The  Company  is  currently  evaluating  its plan to open four to eight new
Sharper Image stores during fiscal 1998.  Total capital  expenditures  estimated
for new and existing stores,  corporate headquarters and the distribution center
for fiscal 1998 are between $6 million and $8 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.

Year 2000 Compliance

     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  assessed  its
computer and business processes,  and is reprogramming its computer applications
to provide for their continued functionality.  An assessment of the readiness of
the external entities with which it interfaces is ongoing.

     The Company expects that the principal costs will be those  associated with
the remediation and testing of its computer applications.  This effort was begun
in  1996  and is  following  a  process  of  inventory,  scoping  and  analysis,
modification,  testing and  implementation.  These efforts will be met primarily
from existing  resources through a  reprioritization  of technology  development
initiatives. The Company expects to complete the majority of its efforts in this
area during 1998 with final completion in mid-1999.  The estimated cost for this
project is between $500,000 and $1,000,000 and is being funded through operating
cash flows. The cost of the project and the expected  completion dates are based
on management's best estimates.


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  statements or reflect
events or circumstances after the date hereof.



<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,  1998 and  1997,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for each of the three  fiscal  years in the
period ended January 31, 1998. 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,
1998 and 1997,  and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1998 in  conformity  with
generally accepted accounting principles.

/s/ Deloitte & Touche LLP
-------------------------

San Francisco, California
March 25, 1998



<PAGE>


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


                                                 Fiscal Year Ended
                                                     January 31,
                                       -----------------------------------------
Dollars in thousands
except per share amounts                  1998            1997           1996
--------------------------------------------------------------------------------

Revenues:
  Sales                                $   245,095     $   236,844    $  230,410
  Less: returns and allowances              29,902          29,074        28,010
                                       -----------     -----------    ----------
  Net Sales                                215,193         207,770       202,400
  List rental                                  982           1,177         1,102
  Licensing                                    640           1,298           682
                                       -----------     -----------    ----------
                                           216,815         210,245       204,184
                                       -----------     -----------    ----------
Costs and Expenses:
  Cost of products                         115,535         108,799       102,728
  Buying and occupancy                      23,904          23,967        21,314
  Advertising and promotion                 22,795          25,736        31,710
  General, selling, and administrative      53,074          50,671        48,072
  Provision for loss due to closure of 
    SPA Collection division                   --             8,000          --
                                       -----------     -----------    ----------
                                           215,308         217,173       203,824
                                       -----------     -----------    ----------
Other Income (Expense):
  Interest income (expense) -- net            (564)           (391)          220
  Other -- net                                  45              78           159
                                       -----------     -----------    ----------
                                              (519)           (313)          379
                                       -----------     -----------    ----------
Earnings (Loss) before Income Tax 
  (Benefit)                                    988          (7,241)          739
Income Tax (Benefit)                           395          (2,896)          295
                                       -----------     -----------    ----------
Net Earnings (Loss)                    $       593     $    (4,345)   $      444
                                       ===========     ===========    ==========
Net Earnings (Loss) Per Share --
  Basic                                $      0.07     $     (0.53)   $     0.05
                                       ===========     ===========    ==========
Net Earnings (Loss) Per Share -- 
  Diluted                              $      0.07     $     (0.53)   $     0.05
                                       ===========     ===========    ==========
Weighted Average Number of Shares --
  Basic                                  8,303,425       8,260,208     8,249,259
                                       ===========     ===========    ==========
Weighted Average Number of Shares -- 
  Diluted                                8,537,032       8,260,208     8,682,078
                                       ===========     ===========    ==========

                       See Notes to Financial Statements.

                                       17

<PAGE>


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


                                                              January 31,
                                                        ------------------------
Dollars in thousands except per share amounts              1998        1997
--------------------------------------------------------------------------------
Assets

Current Assets:
  Cash and equivalents                                  $  3,501    $ 10,873
  Accounts receivable, net of allowance for doubtful
    accounts of $508 and $505                              8,189       5,915
  Merchandise inventories                                 34,534      27,365
  Deferred catalog costs                                   4,982       3,713
  Prepaid expenses and other                               3,429       4,495
                                                        --------    --------
Total Current Assets                                      54,635      52,361
Property and Equipment, Net                               20,842      23,012
Deferred Taxes and Other Assets                            3,185       3,431
                                                        --------    --------
  Total Assets                                          $ 78,662    $ 78,804
                                                        ========    ========


Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                                      $ 18,439    $ 17,025
  Accrued expenses                                        16,832      19,628
  Deferred revenue                                         6,784       5,045
  Income taxes payable                                      --           307
  Current portion of notes payable                           947         927
                                                        --------    --------
Total Current Liabilities                                 43,002      42,932
Notes Payable                                              3,299       4,245
Other Liabilities                                          3,205       3,178
                                                        --------    --------
Total Liabilities                                         49,506      50,355
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, 8,356,280 and 8,266,940 shares             83          83
   Additional paid-in capital                              9,704       9,590
   Retained earnings                                      19,369      18,776
                                                        --------    --------
Total Stockholders' Equity                                29,156      28,449
                                                        --------    --------
  Total Liabilities and  Stockholders' Equity           $ 78,662    $ 78,804
                                                        ========    ========

                       See Notes to Financial Statements.

<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, 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
Issuance of common stock for stock options                  124,340            1               237                              238
Repurchase of common stock                                  (35,000)          (1)             (123)                            (124)
Net earnings                                                                                                     593            593
                                                          ---------         ----          --------          --------       --------
Balance at January 31, 1998                               8,356,280         $ 83          $  9,704          $ 19,369       $ 29,156
                                                          =========         ====          ========          ========       ========

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


<PAGE>


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


<CAPTION>
                                                                                                   Fiscal Year
                                                                                                 Ended January 31,
                                                                                 --------------------------------------------------
Dollars in thousands                                                               1998                 1997                 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>                  <C>     
Cash was Provided by (Used for) Operating Activities:
  Net earnings (loss)                                                            $    593             $ (4,345)            $    444

  Adjustments to reconcile net earnings (loss) to net cash
    provided by (used for) operations:
    Depreciation and amortization                                                   4,334                4,195                3,461
    Deferred rent expense                                                             151                  142                   69
    Deferred income taxes                                                           1,614               (3,188)                (127)

  Change in operating assets and liabilities:
    Accounts receivable                                                            (2,274)              (1,479)              (1,202)
    Merchandise inventories                                                        (7,169)              (3,052)                (758)
    Deferred catalog costs, prepaid expenses and other                             (1,571)                  54               (2,018)
    Accounts payable and accrued expenses                                             838(1)            11,429(1)             4,141
    Deferred revenue and other liabilities                                          1,308                 (508)                (347)
                                                                                 --------             --------             --------
Cash Provided by (Used for) Operating Activities                                   (2,176)               3,248                3,663
                                                                                 --------             --------             --------

Cash was Provided by (Used for) Investing Activities:
  Property and equipment expenditures                                              (4,437)              (6,579)             (11,507)
  Disposals of equipment                                                               53                   98                   14
                                                                                 --------             --------             --------
Cash Used for Investing Activities                                                 (4,384)              (6,481)             (11,493)
                                                                                 --------             --------             --------

Cash was Provided by (Used for) Financing Activities:
  Issuance of common stock for stock options                                          238                   36                  128
  Repurchase of common stock                                                         (124)                --                   (606)
  Proceeds from notes payable and revolving loan                                   27,761               25,665               14,000
  Principal payments on notes payable and revolving loan                          (28,687)             (24,071)             (11,409)
                                                                                 --------             --------             --------
Cash Provided by (Used for) Financing Activities                                     (812)               1,630                2,113
                                                                                 --------             --------             --------

Net Decrease in Cash and Equivalents                                               (7,372)              (1,603)              (5,717)
Cash and Equivalents at Beginning of Period                                        10,873               12,476               18,193
                                                                                 --------             --------             --------
Cash and Equivalents at End of Period                                            $  3,501             $ 10,873             $ 12,476
                                                                                 ========             ========             ========

Supplemental Disclosure of Cash Paid for:
  Interest                                                                       $    771             $    700             $    312
  Income Taxes                                                                   $    409             $    459             $  1,971


<FN>
1    Includes $(4,178) and $8,000 of change in accrued  liabilities for fiscal years ended January 31, 1998 and 1997, 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, 1998, 1997, and 1996


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 $3,580,000,  $5,306,000,  and $3,807,000, for the fiscal years ended
January 31, 1998, 1997, and 1996.

Property and Equipment:  Property and equipment are stated at cost. Depreciation
is computed using the  straight-line  method over the estimated  useful lives of
the various assets which range from three to ten years for office  furniture and
equipment and transportation equipment, and 40 years for the building. Leasehold
improvements  are amortized  using the  straight-line  method over the lesser of
their  estimated  useful lives or the term of the applicable  lease which ranges
from 7 to 18 years.

The Company  manufactures  its own  proprietary  products  for sale  through its
stores and catalogs.  Costs  incurred for tooling,  dies and package  design are
deferred and  amortized  over the  estimated  life of these  products,  which is
generally two years. At January 31, 1998 and 1997, capitalized costs included in
property  and  equipment,  net of  related  amortization,  were  $1,566,000  and
$585,000, respectively.

The Company reviews its long-lived  assets,  including  identifiable  intangible
assets,  whenever events or changes  indicate the carrying amount of such assets
may not be recoverable.  The Company's policy is to review the recoverability of
all assets, at a minimum,  on an annual basis.  Based on the Company's review at
January 31, 1998, no material adjustment was made to long-lived assets.

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

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

Earnings Per Share:  In 1997, the Company adopted the provisions of Statement of
Financial  Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128
requires  companies to present basic earnings per share and diluted earnings per
share.  Basic  earnings  per share is  computed as net  earnings  divided by the
weighted  average  number  of  common  shares  outstanding  during  each year of
8,303,425,  8,260,208,  and  8,249,259,  for the fiscal years ended  January 31,
1998, 1997, and 1996. Diluted earnings per share reflects the potential dilution
that could occur from common shares issuable through stock options, adjusted for
233,607 and 432,819  incremental shares assumed issued on the exercise of common
stock during the fiscal  years ended  January 31, 1998 and 1996.  Stock  options
were excluded from the  computation of diluted loss per share for the year ended
January 31, 1997, as the effect would be anti-dilutive.

Options for which the exercise  price was greater than the average  market price
of common stock for the period were not included in the  computation  of diluted
earnings per share.  The number of such options for which the exercise price was
greater  than the average  market  price of $3.56 and $6.31 for the fiscal years
ended January 31, 1998 and 1996, was 97,500 and 642,400.

New Accounting  Standards:  In 1997, the Financial  Accounting  Standards  Board
(FASB)  issued  Statement  of  Financial  Accounting  Standards  (SFAS) No. 130,
Reporting   Comprehensive  Income,  which  prescribes  standards  for  reporting
comprehensive  income and its components.  Comprehensive  income consists of net
income or loss for the current period and other  comprehensive  income  (income,
expenses,  gains and losses that currently  bypass the income  statement and are
reported directly as a separate component of equity). SFAS No. 130 requires that
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements.

In 1997,  the FASB  issued  SFAS  No.  131,  Disclosures  about  Segments  of an
Enterprise  and  Related  Information,  which  establishes  annual  and  interim
reporting   standards  for  an  enterprise's   operating  segments  and  related
disclosures  about  its  products,   services,   geographical  areas  and  major
customers.

Adoption  of  these  statements  will  not  impact  the  Company's  consolidated
financial  position  results of  operations or cash flows and any effect will be
limited to the form and content of  disclosures.  Both SFAS No. 130 and SFAS No.
131 are effective for the Company in 1998.

Reclassification:  Certain  reclassifications  have  been  made to prior  years'
financial statements in order to conform with the classifications of the January
31, 1998 financial statements.

                                       21

<PAGE>


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

Fiscal Years Ended January 31, 1998, 1997, and 1996


Note B -- Property and Equipment

Property and equipment is summarized as follows:

                                                      January 31,
                                                 ----------------------
Dollars in thousands                               1998          1997
-----------------------------------------------------------------------
Leasehold improvements                           $ 24,071     $ 24,341
Office furniture and equipment                     30,313       26,839
Transportation                                      2,439        2,422
Land                                                   53           53
Building                                            2,874        2,874
                                                  --------     --------
                                                   59,750       56,529

Less accumulated depreciation
  and amortization                                 38,908       33,517
                                                  --------     --------
                                                 $ 20,842     $ 23,012
                                                  ========     ========


Note C -- Other Assets

The  Company has an  agreement  under  which it will  advance the  premiums on a
split-dollar life insurance policy for its Chairman of the Board,  Founder,  and
Chief Executive  Officer.  The Company has an interest in the insurance benefits
equal to the amount of the premiums advanced. The amount receivable for premiums
advanced  as  of  January  31,  1998  and  1997  was  $590,000   and   $392,000,
respectively.

Note D -- Revolving Loan and Notes Payable

The Company has a revolving secured credit facility with The CIT  Group/Business
Credit, Inc., which expires September 2001. The credit facility has been amended
on several  occasions  and, as of January 31,  1998,  the  agreement  allows the
Company  borrowings and letters of credit up to a maximum of $25 million for the
period from October 1, 1997 through December 31, 1997, and $20 million for other
times of the year based on inventory  levels.  The credit facility is secured by
the Company's inventory,  accounts  receivable,  general intangibles and certain
other assets.  Borrowings under this facility bear interest at either prime plus
0.75% 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 and  contains  limitations  on  operating
leases,  other  borrowings,  dividend  payments and stock  repurchases.  For the
period ended January 31, 1998, the Company was in compliance with all covenants.
For the period ended January 31, 1997,  the Company was out of  compliance  with
the working  capital and fixed asset coverage  ratios as a result of the closure
of  the  SPA  Collection  division.   The  Company  received  waivers  for  such
non-compliance.

Subsequent  to  January  31,  1998,  an  amendment  to the credit  facility  was
completed  to set lower  interest  rates  based on  performance,  to provide for
additional  seasonal  borrowings and to extend the expiration to September 2003.
Borrowings under the credit facility will now bear interest at either prime plus
0.50% per annum or at LIBOR  plus  2.50% per  annum.  The  credit  facility  was
seasonally increased as follows:

October 1 through December 31,

1998                                                                 $28 million
1999                                                                 $30 million
2000                                                                 $31 million
2001                                                                 $32 million
2002                                                                 $33 million


At January 31, 1998 and 1997,  the  Company  had no amounts  outstanding  on its
revolving loan credit facility.  Letter of credit  commitments as of January 31,
1998 and 1997 were $2,321,000 and $1,285,000, respectively.

In  addition,   the  credit  facility   provides  for  term  loans  for  capital
expenditures  (Term Loans) up to an aggregate of $4.5 million.  Amounts borrowed
under the Term Loans bear  interest at a variable  rate of either  prime plus 1%
per annum or at LIBOR  plus 3% per  annum.  Each Term Loan is to be repaid in 36
equal  monthly  principal  installments.  Subsequent  to January 31,  1998,  the
variable  interest  rate for all Term  Loans was  lowered to prime plus 0.75% or
LIBOR plus 2.75%.  Notes payable  included a Term Loan which bears interest at a
variable  rate of prime plus 1%,  provides  for  monthly  principal  payments of
$55,555  plus the related  interest  payment,  and matures in October  1999.  At
January  31,  1998 and 1997,  the  balance of the Term Loan was  $1,167,000  and
$1,833,000, respectively.

Notes  payable  also  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.
The respective  balance of each note payable is $2,772,000 and $307,000.  Future
minimum principal payments on notes payable are as follows:

Dollars in thousands
--------------------------------------------------------------------------------
Year ending January 31,
1999                                                                     $   946
2000                                                                         787
2001                                                                         147
2002                                                                         160
2003                                                                         173
Later years                                                                2,033
                                                                         -------
Total notes payable                                                      $ 4,246
                                                                         =======

                                       22

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

Fiscal Years Ended January 31, 1998, 1997, and 1996


Note E -- Income Taxes

                                                     January 31,
                                      ------------------------------------------
Dollars in thousands                    1998             1997             1996
--------------------------------------------------------------------------------
Currently payable (refundable):
  Federal                             $(1,036)         $   248          $   359
  State                                  (183)              44               63
                                      -------          -------          -------
                                       (1,219)             292              422

Deferred:
  Federal                               1,372           (2,710)            (107)
  State                                   242             (478)             (20)
                                      -------          -------          -------
                                        1,614           (3,188)            (127)
                                      -------          -------          -------
                                      $   395          $(2,896)         $   295
                                      =======          =======          =======

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

                                                         January 31,
                                               --------------------------------
                                               1998          1997          1996
-------------------------------------------------------------------------------
Federal tax rate                               34.0%         34.0%         34.0%
State income tax,
  less federal benefit                          6.0           6.0           6.0
                                               ----          ----          ----
Effective tax rate                             40.0%         40.0%         40.0%
                                               ====          ====          ====

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

                                                              January 31,
                                                       ------------------------
Dollars in thousands                                    1998             1997
-------------------------------------------------------------------------------
Current:
  Nondeductible reserves                               $ 3,809          $ 4,457
  Deferred catalog costs                                (1,993)          (1,485)
  State taxes                                             (569)            (551)
                                                       -------          -------
Current -- net                                           1,247            2,421
                                                       -------          -------
Noncurrent:
  Deferred rent                                          1,429            1,566
  Depreciation                                           2,356            2,512
  Deductible software costs                             (1,050)            (924)
  Other -- net                                            (189)            (168)
                                                       -------          -------
Noncurrent -- net                                        2,546            2,986
                                                       -------          -------
Total                                                  $ 3,793          $ 5,407
                                                       =======          =======


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, 1998, are as follows:

Dollars in thousands
--------------------------------------------------------------------------------
Year ending January 31,
1999                                                                    $ 14,280
2000                                                                      14,013
2001                                                                      12,540
2002                                                                       8,486
2003                                                                       7,919
Later years                                                               22,318
                                                                        --------
Total minimum lease commitments                                         $ 79,556
                                                                        ========



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                      1998        1997        1996
------------------------------------------------------------------------
Minimum rentals                         $ 13,812    $ 13,259    $ 11,917
Percentage rentals and other charges       5,559       5,546       5,093
                                        --------    --------    --------
                                        $ 19,371    $ 18,805    $ 17,010
                                        ========    ========    ========

                                       23

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

Fiscal Years Ended January 31, 1998, 1997, and 1996


Note G -- Stockholders' Equity

Under the Company's stock repurchase  program,  the Company is authorized by its
Board of Directors to repurchase up to $1,600,000 of common stock. During fiscal
1997 and fiscal 1995, the Company  repurchased  35,000 shares for $124,000,  and
94,800 shares for $606,000, under this stock repurchase program. Through January
31, 1998,  the Company has  repurchased a total of 186,100  shares at an average
price of $5.95 per share.

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, 1998, the Company had reserved  513,120 shares and 27,000 shares,
under the 1985  Stock  Option  Plan and the 1994  Non-Employee  Directors  Stock
Option Plan, respectively, for the granting of additional stock options.


Additional Stock Plan Information

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

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

These models also require subjective  assumptions,  including future stock price
volatility  and expected time to exercise,  which greatly  affect the calculated
values.  The Company's  calculations  were made using the  Black-Scholes  option
pricing model with the following  weighted average  assumptions:  expected life,
five years from date of grant;  stock volatility,  51% in fiscal 1997 and 45% in
both fiscal 1996 and fiscal  1995;  risk-free  interest  rates,  6.10% in fiscal
1997,  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  1997,  fiscal 1996 and fiscal 1995 awards had been  amortized to expense
over the vesting period of the awards,  pro forma net earnings (loss) would have
been $383,000 ($0.05 earnings per share -- basic and $0.04 earnings per share --
diluted)  in  fiscal  1997,  $(4,576,000)  ($0.55  loss per  share -- basic  and
diluted)  in fiscal 1996 and  $317,000  ($0.04  earnings  per share -- basic and
diluted) 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 1997, 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.

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

Fiscal Years Ended January 31, 1998, 1997, and 1996


Note G -- Stockholders' Equity (continued)

The following table reflects the activity under these plans:
                                                                  Weighted
                                                    Number of      Average
                                                    Options     Exercise Price
                                                   ---------------------------
Balance at January 31, 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
Granted (weighted average fair value of $1.81)       129,300        3.24
Exercised                                           (124,340)       1.92
Cancelled                                            (71,260)       3.83
                                                   ---------
Balance at January 31, 1998                        1,438,200      $ 3.21
                                                   =========

Exercisable at January 31, 1996                      624,000      $ 1.70
                                                   =========
Exercisable at January 31, 1997                      650,000      $ 2.49
                                                   =========
Exercisable at January 31, 1998                      591,000      $ 2.73
                                                   =========
<TABLE>
<CAPTION>
                       Options Outstanding                      Options Exercisable
-------------------------------------------------------     -----------------------------
                                   Weighted
                                    Average     Weighted
                    Number         Remaining     Average     Number          Weighted
   Range of       of Options      Contractual    Exercise   of Options       Average
Exercise Prices   Outstanding     Life (years)    Price     Exercisable    Exercise Price
-------------------------------------------------------     -----------------------------
<S>               <C>                <C>         <C>          <C>             <C>
$1.16-$1.99         254,590          3.6         $ 1.88       255,000         $ 1.88
 2.00- 3.99       1,101,110          8.6           3.37       301,000           3.13
 4.00- 7.00          82,500          7.2           5.20        35,000           5.42
                  ---------                                   -------
$1.16-$7.00       1,438,200          7.6         $ 3.21       591,000         $ 2.73
                  =========                                   =======
</TABLE>
Note H -- 401k Savings Plan

The Company  maintains a defined  contribution,  401k  Savings  Plan (the Plan),
covering  all  employees  who have  completed  one year of service with at least
1,000  hours and who are at least 21 years of age.  The Company  makes  employer
matching  contributions  at its discretion.  Company  contributions  amounted to
$77,000, $81,000, and $79,000 for the fiscal years ended January 31, 1998, 1997,
and 1996, respectively.


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

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

During the fourth quarter of fiscal 1996, the Company incurred a one-time charge
related to the closure of the SPA Collection division of $8,000,000  ($4,800,000
net of the tax  benefit,  or 56  cents  loss per  share).  The  one-time  charge
primarily  related  to the  lease  commitments  and the net book  value of fixed
assets related to the SPA  Collection  division.  The liability  related to this
one-time  charge at January 31,  1998,  and January 31,  1997,  in the amount of
$3,822,000 and $8,000,000, respectively, was included in accrued expenses.


Note J -- Commitments and Contingencies

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

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

Fiscal Years Ended January 31, 1998, 1997, and 1996


<TABLE>
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, 1998                                     1997              1997              1997              1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>               <C>               <C>     
Revenues                                                             $ 36,273          $ 43,340          $ 41,106          $ 96,096
Expenses
  Cost of products                                                     19,563            23,472            22,115            50,385
  Buying and occupancy                                                  5,707             5,783             5,946             6,468
  Advertising and promotion                                             3,546             4,715             4,036            10,498
  General, selling and administrative                                  11,021            11,739            11,429            18,885
Other income (expense)                                                    (45)             (118)             (198)             (158)
Earnings (loss) before income tax (benefit)                            (3,609)           (2,487)           (2,618)            9,702
Income tax (benefit)                                                   (1,443)             (995)           (1,047)            3,880
Net earnings (loss)                                                  $ (2,166)         $ (1,492)         $ (1,571)         $  5,822
Net earnings (loss) per share -- Basic                               $  (0.26)         $  (0.18)         $  (0.19)         $   0.70
                                 Diluted(2)                          $  (0.26)         $  (0.18)         $  (0.19)         $   0.67


                                                                                         Three Months Ended
                                                                    ----------------------------------------------------------------
                                                                    April 30,          July 31,         October 31,      January 31,
Fiscal year ended January 31, 1997                                     1996              1996              1996              1997
------------------------------------------------------------------------------------------------------------------------------------
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 -- Basic                               $  (0.27)         $  (0.13)         $  (0.20)         $   0.07
                                 Diluted(2)                          $  (0.27)         $  (0.13)         $  (0.20)         $   0.07


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

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

<PAGE>

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


Board of Directors
--------------------------------------------------------------------------------

Richard Thalheimer                          Morton David*
Founder                                     Retired Chairman, President, and
Chairman of the Board                       Chief Executive Officer
Chief Executive Officer                     Franklin Electronic Publishers, Inc.
                                            *Joined January 1998.

Elyse Eng Thalheimer                        Gerald Napier
                                            Retired President of
                                            I. Magnin and Company
Alan Thalheimer
Retired Business Executive

Maurice Gregg
Retail Financial Consultant


Officers
--------------------------------------------------------------------------------

Richard Thalheimer                          Roger Bensinger
Founder                                     Vice President
Chairman of the Board                       Business Development
Chief Executive Officer

Barry Gilbert                               Greg Hickey
Vice Chairman                               Vice President
Chief Operating Officer                     Management Information Systems

Craig Womack                                Barry Jacobsen
President                                   Vice President
Chief Administrative Officer                Distribution

Davia Kimmey                                Woodrow Nelson
Senior Vice President                       Vice President
Marketing                                   Creative Services

Shannon King                                Judith Serlin
Senior Vice President                       Vice President
Merchandising                               Merchandising

Tracy Wan                                   Mary Tanner
Senior Vice President                       Vice President
Chief Financial Officer                     Human Resources
Corporate Secretary
                                            Charles Taylor
                                            Vice President
                                            Merchandising

                                            Robert Thompson
                                            Vice President
                                            Merchandising

                                            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 LLC
85 Challenger Road
Overbeck Center
Ridgefield Park, NJ 07660

Corporate Counsel
Brobeck, Phleger & Harrison LLP
One Market
Spear Street Tower
San Francisco, CA 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 8, 1998,  at 10 am at the World  Trade Club,  Ferry  Building,  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 1997   Fiscal Year 1996
                              High       Low     High     Low

First Quarter                 4 3/4     3        6 1/4    3 5/8
Second Quarter                4         2 7/8    6 3/8    3 1/2
Third Quarter                 3 7/8     2 13/16  4 1/2    3 1/4
Fourth Quarter                4 3/8     2 7/8    4 1/8    3 1/8



<PAGE>


<TABLE>
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                         Fiscal Year Ended January 31,
                                               -----------------------------------------------------------------------------------
<S>                                            <C>               <C>                <C>               <C>             <C>         
Operating Results                                  1998              1997               1996              1995             1994
Revenues                                       $    216,815      $    210,245       $    204,184      $    188,535    $    147,441
Provision for loss on the closure of
  the SPA Collection division                          --              (8,000)              --                --              --
Earnings (loss) before income taxes                     988            (7,241)               739             6,139           2,939
Net earnings (loss)                                     593            (4,345)               444             3,683           1,763
Net earnings (loss) per share -- Basic(1)      $       0.07      $      (0.53)      $       0.05      $       0.44    $       0.21
                                 Diluted(1)    $       0.07      $      (0.53)      $       0.05      $       0.41    $       0.20

Balance Sheet Data
Working capital                                $     11,633(2)   $      9,429(2)    $     17,233      $     23,011    $     19,488
Total assets                                         78,662            78,804             70,456            64,036          55,095
Notes payable                                         3,299             4,245              3,355               838             987
Stockholders' equity                           $     29,156      $     28,449       $     32,758      $     32,792    $     29,868
Current ratio                                          1.27              1.22               1.56              1.85            1.94

Statistics
Number of stores at year end                             85                82(3)              78(3)             74              73
Comparable store sales                                  1.1%             (2.1)%              3.3%             17.8%           (4.1)%
Annualized net sales per square foot           $        465      $        458       $        473      $        468    $        385
Number of catalogs mailed                        44,544,000(4)     37,695,000(4)      32,780,000(4)     31,522,000      25,879,000
Number of catalog orders                            422,000           470,000            536,000           426,000         252,000
Average revenue per order:
  Stores                                       $        104      $         97       $        106      $        102    $         95
  Catalog                                      $        158(5)   $        134(5)    $        122      $        116    $        120
Returns on average stockholder's equity                 2.1%              N/A                1.4%             11.8%            6.1%
Book value per share                           $       3.51      $       3.44       $       3.97      $       3.96    $       3.61
Weighted average number of shares
  outstanding -- Basic(1)                         8,303,425         8,260,208          8,249,259         8,294,378       8,248,159
                 Diluted(1)                       8,537,032         8,260,208          8,682,078         8,899,289       8,683,929

<FN>
Dollars are in thousands except Net earnings (loss) per share and Statistics.

1 Amounts have been restated to reflect the adoption of SFAS No. 128 in fiscal year ended January 31, 1998.

2 Includes  $3,822 and $8,000 of accrued  liabilities  at January  31, 1998 and 1997,  related to the closure of the SPA  Collection
division.

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

4 Includes 6,283,000 and 2,900,000 of The Sharper Image Home Collection  catalogs mailed for January 31, 1998 and 1997. Excludes SPA
Collection catalogs mailed for January 31, 1997 and 1996.

5 Excludes The Sharper Image Home Collection which had average revenue per order of $678 and $577 for January 31, 1998 and 1997.
</FN>
</TABLE>

(a)  Industry  average  statistics  for  "Specialty  Stores -- Hard  Goods"  per
National Retail Federation.

(b) Industry average statistic is not yet available.

Sales per Square Foot

         Industry Average(a)        Sharper Image

1993            $202                   $385
                                     
1994            $234                   $468
                                     
1995            $252                   $473
                                     
1996            $343                   $458
                                     
1997(b)                                $465
                           

                Revenue Growth 
            (in millions of dollars)

                                    Sharper Image

1993                                   $147.4
                                       
1994                                   $188.5
                                       
1995                                   $204.2
                                       
1996                                   $210.2
                                       
1997                                   $216.8
                                       

             Customer File Growth 
                (in millions)

                                    Sharper Image

1993                                    4.4
                                        
1994                                    5.0
                                        
1995                                    5.5
                                        
1996                                    6.2
                                        
1997                                    6.6